Jan 27, 2020 11:29 PM | Kyle Torpey


Decentralized finance (DeFi) has been the biggest story in Ethereum over the past couple of years, growing from nothing to an $800 million market since August 2017, according to DeFi Pulse. Starting with the launch of MakerDAO, there are now six separate Ethereum DeFi apps holding at least $10 million worth of crypto in them.

DeFi is basically a group of decentralized applications that are intended to replace many of the services associated with traditional financial institutions. While DeFi applications can be built on a number of different cryptocurrency networks, including Bitcoin, DeFi is mostly associated with Ethereum.

While there has been tremendous growth in the amount of money controlled by DeFi applications built on Ethereum, this growth has not been reflected in the price of ETH.

Ethereum’s native token is still down 88% from the all-time high of $1,419.96 in January 2018, according to TradingView data of the Coinbase ETH/USD exchange rate. That said, the ETH price in USD has roughly doubled itself since the lows hit in early December 2018.

From a more troubling perspective, ETH is worth less today in terms of BTC than it was in March 2016, according to Coin Metrics.

So, why hasn’t the ETH taken off the market to support DeFi applications led to a higher ETH price?

To gain greater insight into DeFi’s effect on the price of ETH (or the lack thereof), LongHash reached out to crypto asset research firm Delphi Digital’s Anil Lulla and Yan Liberman.

The DeFi Boom is Nothing Compared to the ICO Bubble of 2017

According to the duo from Delphi Digital, there is plenty of reason to be excited about the future of DeFi, but the reality is this new frontier for Ethereum doesn’t account for anywhere near the level of activity around the 2017 bubble in initial coin offerings (ICOs).

“It’s worth taking a step back to understand the size of the DeFi space relative to ETH,” said Delphi Digital. “ETH locked in DeFi just crossed 3 million. Although that’s a year-over-year increase of about 1 million ETH, it still represents less than 3% of the total supply (109 million).”

Delphi Digital went on to point out that the 3 million ETH currently locked up in various DeFi applications is small potatoes compared to the more than 16 million ETH raised via ICOs from mid-2016 to mid-2018. It should be noted that this was at a time when ETH’s supply was even lower (ranging from roughly 81 million to around 101 million), which means ICOs were accounting for an even greater percentage of the currently available supply of ETH.

“It’s important to keep in mind that it’s not apples to apples because it wasn’t as if this 16 million was locked up simultaneously,” added Delphi Digital. “However, of the roughly 11.5 million ETH raised in ICOs through the end of 2017, only around 29% of that was sent to exchanges. It’s safe to say that the general bull market was by and large the primary driver of the ETH price in 2017, but these values help quantify how much more of an impact the ICO period had on ETH price demand relative to current DeFi, and why the impact of DeFi has still been relatively muted.”

Lulla and Liberman also pointed out that DeFi has, for the most part, only taken off primarily among people who are already involved in the crypto market and would like to gain greater productivity out of their ETH while they continue to hold for the long term.

“Put simply, none of these DeFi projects are attracting new capital to flow into ETH as buying pressure,” said the Delphi Digital duo.

Is the Selling of Ether by ICOs Still a Price Depressant?

A previous report from Delphi Digital indicated that the selling of ETH by ICO treasuries was an active depressant on the price of ETH. As of that February 2019 report, Delphi Digital had found that 60% of the ETH raised via the ICOs they tracked had been sent to exchanges, although the total amount of ETH sold via ICO treasuries was likely higher due to the omittance of over-the-counter (OTC) deals.

When asked if the selling of ETH is still a major depressant on the ETH price, Delphi Digital responded, “This is a difficult question to answer. On one hand, there's obviously a lot less ETH left to be sold by these ICOs, so you can say it has less of an impact. On the other hand, determining ‘if it has an impact’ requires you to net it against the average demand for ETH. Most demand is still speculation-driven, and there's a lot less of it, so it could be dragging down price because of it.”

However, Delphi Digital added, “It's probably less so the ICO selling that's dragging down price and more so general speculation (from both buyers and sellers) that's the primary price driver.”

For DeFi to start having a greater impact on the ETH price, these applications will need to attract users who haven’t already been holding ETH for a number of years. That said, from the perspective of Delphi Digital, general speculation on the price of ETH is still the main driving force behind the crypto asset's valuation.

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