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DeFi has a problem, pump and dumps
When the bull market was in full swing, investing in decentralized finance (DeFi) tokens was like shooting fish in a barrel, but now that inflows to the sector pale in comparison to the market’s heyday, it’s much harder to identify good trades in the space.
During the DeFi summer, protocols were able to lure liquidity providers by offering three- to four-digit yields and mechanisms like liquid staking, lending via asset collateralization and token rewards for staking. The big issue was many of these reward offerings were unsustainable, and high emissions from some protocols led liquidity providers to auto-dump their rewards, creating constant sell pressure on a token’s price.
Total value locked (TVL) wars were another challenge faced by DeFi protocols, which had to constantly vie for investor capital in order to maintain the number of “users” willing to lock their funds within the protocol. This created a scenario where mercenary capital from whales and other cash-flush investors essentially airdropped funds to platforms offering the highest APY rewards for a short period of time, before eventually dumping rewards in the open market and shifting the investment funds to the greener pastures.
For platforms that secured series funding from venture capitalists, the same sort of activity took place. VCs pledge funds in exchange for tokens, and these entities reside in the ranks of the largest tokenholders in the most lucrative liquidity pools. The looming threat of token unlocks from early investors, high reward emissions and the steady auto-dumping of said rewards led to constant sell pressure and obviously stood in the way of any investor deciding to make a long investment based on fundamental analysis.
Combined, each of these scenarios created a vicious cycle where protocol TVL…
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