The hype surrounding decentralized finance is sometimes credited with triggering a wider market rally in July, as new protocols began releasing tokens that were immediately posting gains of many times their initial value. Despite undeniable toll growth, nevertheless, it is not immediately clear if the sector equally a whole has grown, equally reliable metrics to measure out the key operation of DeFi protocols are incredibly hard to come up by.

The projects lend themselves to adequately rigorous analysis methods, as they will often have well-divers revenues and expenses. But the rise of liquidity mining, or yield farming, is throwing the metrics off balance in some ways. Protocols advantage their users with their own governance tokens, essentially equally a payment for using the platform. A frenzied movement to maximize the yield for these tokens distorted the prevailing DeFi success metric, the Total Value Locked, or TVL.

A clear example of this is the Compound protocol where the value of Dai supplied to it surpasses its total amount of tokens by almost three times — $1.1 billion vs. $380 1000000 in existence every bit of writing. This is due to Compound users entering leveraged positions on Dai — something that ordinarily does not happen with stablecoins. While this led the community to discuss the merits of TVL, some other similar measurements take been distorted also.

Evaluating a DeFi lending project

Valuation metrics will change slightly based on the type of project. In the case of lending protocols like Compound and Aave, TVL represents the supply-side liquidity of the projection or the total sum of all deposits currently held by them. It is worth noting that TVL simply takes the on-chain reserves into account. Co-ordinate to DeFi Pulse, at that place are only effectually 220 million Dai locked in Compound, not 1.1 billion.

DAI locked in Compound

DAI locked in Chemical compound. Source: Defipulse.com

Withal, lending providers are mostly evaluated based on volume value, or how much is being borrowed. Since that is what generates revenue, it's considered a much more direct measurement of the protocol's financials.

Due to the distribution of the network'due south money, COMP, however, all tokens except Tether (USDT) and 0x (ZRX) have negative constructive involvement when borrowing, according to Chemical compound's dashboard, significant that users are paid to do so. The Compound protocol is currently offloading that cost to the buyers and holders of COMP through dilution.

Though it may be difficult to filter out how much liquidity there is only to speculate on COMP yields, this may not be necessary. The purpose of evaluating the bank's or lending protocol'south acquirement is to gauge how much of that value can be captured through the stock or token, but since the token is beingness used to subsidize the cost of borrowing, the value is being effectively extracted from its holders. This can be seen through COMP'south token cost. Since its release, it has connected to fall in value due to the dilution and selling pressure from newly mined tokens.

COMP token price chart

COMP token toll nautical chart. Source: TradingView

Due to this phenomenon, an evaluation strategy for Compound could hands ignore, or even subtract, the part of the book value that is extracting value from token holders. Even in the former case, Compound's book value would simply exist $25 meg out of a claimed $i billion — the full sum of the USDT and ZRX being borrowed.

Though obviously non all assets are there just for the yield, Cointelegraph previously reported that just $xxx million worth of Dai was being borrowed but before it became the go-to currency for liquidity mining. Andre Cronje, the founder of the yEarn protocol, told Cointelegraph that the market place has not been taking these nuances into account: "We have this weird TVL equals evaluation mentality, which I practice not understand at all, where if the TVL is $100M, and so the market cap — circulating, not fully diluted — should be $100M." Although he finds information technology "completely insane" to ignore revenue, he continued his thought exercise:

"So, if circulating market cap equals TVL, what's the best style to increase that? Increase TVL. How practise you increase TVL? Reward with tokens. Token value goes upward because of TVL speculation, and repeat the loop."

Furnishings on other protocols

Compound started the yield farming tendency, but information technology was not the only protocol that saw sizable increases in activity. Decentralized exchanges like Uniswap, Balancer and Curve have seen their trading volumes jump dramatically since June. Volume on Curve, a DEX focused on swapping stablecoins with ane some other, jumped equally yield farming began in June.

Monthly volume across decentralized exchanges

Monthly volume across decentralized exchanges. Source: DuneAnalytics

Uniswap has a more varied offering, and most of its book comprises Ether (ETH) to stablecoin pairs, especially Ampleforth — which saw a powerful blast-and-bosom cycle occur. It has also taken in a lot of the volume for new tokens like YFI, ofttimes being the first place where they were listed.

MakerDAO saw its TVL well-nigh triple from $500 million. The bulk of that is due to the Ether toll rally, though information technology grew in terms of ETH and Bitcoin (BTC) as well. As Cointelegraph previously reported, the customs decided to increase the total amount of Dai that could be minted in an effort to return its price to $1.

While at face value, the growth of Dai may be considered a success story, the Maker customs decided to put interest rates for nearly all liquid assets to zero, foregoing any revenue from the growth. At the aforementioned time, Compound has been the main recipient of new Dai, with locked value having risen from well-nigh $140 one thousand thousand to $210 million since late July, over 55% of all Dai.

Is the growth real?

The liquidity mining boom had an undeniably positive impact on some general metrics, specifically the visitor volumes for DeFi platform websites and the number of users interacting with the protocols. Data from SimilarWeb shows that traffic to Chemical compound has quadrupled since June to about 480,000, while for Uniswap it has more than than doubled to 1.1 million, and Balancer established a strong presence in two months with 270,000 monthly visits.

Additionally, DeFi exchange aggregator 1inch.exchange almost tripled its traffic in the terminal two months. Protocols with a weaker relation to yield farming benefited too, with MakerDAO and Aave posting more minor only still significant growth.

Related: Compound's COMP Token Takes DeFi past Tempest, Now Has to Hold Peak Spot

In terms of user volume, Compound saw the number of monthly average unique wallets using it quadruple to twenty,000 in June, though that number has since been decreasing. Also worth noting is that more than 80% of recent activity has been from just 30 wallets, according to DappRadar data.

User activity on Compound

User activity on Compound. Source: DappRadar

The overall number of DeFi users, according to a DuneAnalytics visualization, increased past about 50% from June i to Aug. 1. This is in contrast to the previous two-calendar month menstruum from Apr 1 to May 31, which saw a thirty% growth.

The majority of new users are coming from decentralized exchanges, with Uniswap having doubled its total user base since June to 150,000. However, this metric shows all the users who have interacted with the protocols, not only those who are active at any given moment.

Total DeFi users

Total DeFi users. Source: DuneAnalytics

What volition remain?

In summary, the DeFi growth in the concluding two months is multi-faceted. While the liquidity mining hype and subsequent price gains have likely contributed to attracting additional attention, fundamental metrics became highly distorted due to the speculation.

Decentralized exchanges announced to accept benefited the virtually from the hype, both in terms of new users and volumes, simply that appears to be an dispatch of an already positive tendency. Whether the growth volition stick remains an of import question. Kain Warwick, a co-founder of Synthetix — a crypto-backed asset issuer — told Cointelegraph:

"It's always possible that people volition farm the yield and then find a fresh field, so bootstrapping liquidity is not a guarantee that your protocol will retain users. [...] Merely bootstrapping liquidity with some sort of incentive is a neat manner to attract newcomers considering if you take anything resembling product-market fit, and so at that place is likely to be some stickiness."

Cronje was somewhat more negative, using a farming analogy to describe what could happen, proverb: "All the yield chasers simply running in to farm yield and and then leaving," which is a negative thing co-ordinate to him, acting like a swarm of locusts, adding: "But afterward they have ruined the crops, sometimes, a stronger crop can grow, and some locusts remain, and they end upwardly being symbiotic instead of the initial parasitic."

Cronje believes that the initial effects of yield farming are unsustainable, creating a false perception among newcomers that 1,000% yields are the norm. Once that is no longer the case, users will be left with a bad taste in their mouths, he argues: "Right now, it's overhyped; soon, it will be hated; and what remains later that, I remember, will be pretty absurd."

Distributing tokens in a new way

Warwick described the purpose of liquidity mining as incentivizing early participation with partial ownership. Cronje was much more than skeptical, saying: "All liquidity mining currently is, is getting paid for propped up TVL." Still, he ran a liquidity mining programme himself, though he stressed that it was just a way of distributing tokens.

"My goal was to become an active and engaged customs. And I remember yEarn managed to achieve that," Cronje concluded. By dissimilarity, yEarn forks like YFFI and YFII were "pure liquidity mines, and all that happened was people sold," he said. The price of YFII has collapsed by 90% since its high on July 30.

Warwick noted that "there possibly is a better way to distribute buying while bootstrapping growth," though he does not know how. He still finds it preferable to initial coin offerings, as users only need to temporarily commit their liquidity: "They're obviously taking on some platform run a risk, merely it'due south preferable still to losing their upper-case letter by using it to buy tokens." Simply while the risks for the liquidity miners may be low, the example of YFII clearly shows that the effects of dilution and speculative demand tin plow catastrophic for the buyers of these tokens.