This week definitely feels calmer, more positive than the last. And there’s good reason to be optimistic for DeFi bulls too, as the market posted a decent recovery since my last newsletter.

People are calling it a “blue chip” rally, which means that it’s household names that are leading the charts (at least that’s the standard definition, it may also refer to their blue logos). AAVE and YFI rallied the most, followed by decent recoveries for Curve and Synthetix. These are big names, but at the same time I would give the “blue chip” moniker to stuff like Uniswap, Compound, Maker — all of which made lukewarm gains at best.

In any case, the DeFi Pulse index is doing quite well:

But to me it just seems like a bounce from oversold conditions, which happens even in deep bear markets. The drop stimulated discussion about what exactly we witnessed in the summer — is it like 2017 or 2016? The former had a brief cooldown around September-October to end the year in style, the latter was just fairly constant but produced slow growth back to previous all-time highs.

As much as the “thought leaders” on Twitter like to be bullish on everything, I’d say we’re firmly in the 2016 camp, and there’s this one chart that just nails the point so succinctly:

Google Trends for Bitcoin (red), Ethereum (yellow), DeFi (blue).

There is indeed a pretty sizable bump for DeFi searches around summer. Don’t see it? That’s because its relative performance pales even in comparison to cryptocurrency as a whole, and mainstream awareness like in 2017 is nowhere to be seen. But it is worth mentioning that these results come from a standing start:

Searches for DeFi filtered by “financial markets” category.

There is definitely a positive argument to be found here, as it seems we’re still at the top of the first inning.

But at the same time I think this DeFi rally just encapsulates the worst aspects of 2016 and 2017 into one. We saw a lot of market naiveté and a fundamental failure of the backend infrastructure that resulted in gigantic fees — basically 2017 — and at the same time the average Joe just didn’t hear about it — that’s 2016.

The CEO of FTX is now saying that even Ethereum 2.0 wouldn’t be enough to deal with any load even approaching mainstream popularity, which is reasonable given the much higher processing requirements of DeFi smart contracts.

Overall I think the sector likely won’t resume growth until we have much, much better scaling — promising news on that front for 2021 — and more use cases than just playing Ponzi games or, at best, lending for rich crypto whales.