- Although the market for decentralised financial applications (DeFi) on Ethereum continues to grow strongly, the price of Ethereum has not risen in recent weeks and months.
- At the time of writing, more than USD 800 million are included in Ethereum based DeFi applications.
According to many industry experts, the DeFi market offers enormous potential. Already last year, the amount of Ethereum “locked up” in DeFi applications has increased significantly. The volume is currently well over 800 million USD. Nevertheless, ETH’s price does not (yet) benefit from this. Longhash has investigated why the Ethereum price has not increased at the same rate as the DeFi market.
Ethereum price stagnates despite growth of DeFi
Despite the fact that the DeFi market is largely dominated by Ethereum, there has been no positive effect on the ETH price. The second largest cryptocurrency by market capital is still more than 88 percent below its all-time high of USD 1,448. Even in comparison with Bitcoin, Ethereum is worth less today than it was in 2017.
Longhash has researched the reasons for this and notes in a new report that the growth of DeFi has not resulted in a similar purchasing power as the ICO and crypto boom in 2017 and 2018, during which Ethereum reached its former all-time high of over $1,100:
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.
Anil Lulla and Yan Liberman from the crypto-asset company Delphi Digital explained that ETH currently has just over 3 million in various DeFi applications, compared to the 16 million ETH that were raised from mid-2016 to mid-2018.
It’s worth taking a step back to understand the size of the DeFi space relative to ETH,. 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).
Furthermore, it is described that none of the existing DeFi applications are encouraging investors to invest new capital in ETH:
Put simply, none of these DeFi projects are attracting new capital to flow into ETH as buying pressure.
Moreover, the general bull market in 2017 was the main driving force behind ETH’s all-time high. The same kind of bull run has not yet been seen in the DeFi ecosystem.
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. 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.
Finally, according to Delphi Digital, another reason is that many investors in the market already own cryptocurrencies. At the moment, according to the analysis, there is a lack of new investors who are putting fresh capital into the market. In addition, there are no incentives for potential buyers to enter the DeFi market and buy Ether.
The price of Ethereum is USD 173.90 at the time of writing, up 1.59% in the last 24 hours.