As noted in prior publications, bitcoin has disappointed many onlookers with muted price action, post-halving, for which multiple narratives have taken blame. However, despite the aforementioned “finger pointing,” no analyst has suggested that bitcoin price could be much lower without one large phenomenon occurring over the past 3 months, DeFi explosion.
DeFi, also known as Decentralized Finance, comes in many forms, including lending, derivatives, exchanges, and payments. The nascency and excitement around the space makes new protocol tokens susceptible to boom and bust cycles.
The most recent boom cycle is around liquidity mining. Liquidity mining is an incentive program setup by new DeFi protocols to attract users, i.e. liquidity. These programs typically distribute, so-called governance tokens to these liquidity providers, commonly known as yield farmers.
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Though not new, DeFi incentive programs are cleverly orchestrated growth hacks, which have resulted in incredible spikes in network participation, total value locked, and market cap of governance tokens.
The most prominent example being Compound, a decentralized lending protocol that allows users to borrow and lend from a pool of assets, without permission. Per Delphi Digital and DeFi Pulse, Compound saw its value locked and market cap skyrocket once liquidity mining and governance tokens (COMP) distribution began, currently sitting at $668 million and $497 million, respectively.