Traders are shifting away from investments linked to decentralized finance, in the latest sign of how the $40bn collapses of cryptocurrency luna have sent shockwaves through a key portion of the digital asset market.
Ether, the world’s second-biggest crypto token and a proxy for sentiment on the $100bn DeFi market, has shed more than a third of its value over the past month. Its fall is significantly more severe than the 23 per cent decline for bitcoin, the oldest and most valuable digital token by market value.
Many crypto advocates consider DeFi to be one the most promising innovations in the digital asset industry, with projects aiming to operate without centralized intermediaries such as banks through the use of automated systems that dole out control to the biggest stakeholders.
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However, the failure last month of luna, and its linked stablecoin terraUSD, highlighted the risks of investing in DeFi projects and the potential for catastrophic flaws in the design of programs that underpins their operations.
“Confidence in the crypto ecosystem and decentralised finance remains at historically low levels” after the breakdown of terra and luna, said Sipho Arntzen, an analyst at Swiss private bank Julius Baer, adding that, “we expect no swift recovery for now”.
Stablecoins act as lubricants of transactions in DeFi markets, and the wipeout of terra was seen as a particularly strong blow to confidence in the sector.
Terra was designed to match the value of the US dollar through a financial relationship with sister token luna, in contrast to other major stablecoins that claim to be backed by portfolios of reserves.
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Ether’s fall is a sign of how the crash in terra and luna has sent a chill through the wider DeFi sector, analysts said. The token price is tied to investors’ expectations for the future of DeFi since many of the computerised financial apps in the decentralised market are built on the Ethereum blockchain where ether resides. Source: Financial Times...