The decentralized finance (DeFi) sector is currently the most talked-about area in the cryptocurrency world, surpassing the attention given to public chains and exchange tokens. Over the past three months, MakerDAO's MKR token saw a peak increase of 124%. More strikingly, Compound's COMP token, launched on June 15 at an initial price of $18, skyrocketed to over $300 at one point—a staggering 1700% surge.
This wave of token launches has brought immense visibility and user engagement to DeFi projects. However, it also raises critical questions: Is the current market valuation of DeFi justified? Could these soaring prices eventually harm the ecosystem they are meant to support?
The Recent Wave of DeFi Token Launches
June witnessed a significant surge in DeFi projects launching their native tokens, a movement that has reshaped the landscape.
Compound's COMP Token
Compound introduced its COMP token on June 15, utilizing a novel "lending to mine" distribution model. Users who borrow or lend on the platform are rewarded with COMP. This mechanism sparked immediate and intense interest. The token's price catapulted to approximately $316 before settling around $212, still representing an increase of over 1000% from its launch price.
This price surge had a direct and substantial impact on Compound's core business. Data from DeBank shows the platform's total capital scale—combining collateral locked and outstanding loans—surpassed the $1 billion mark. Its total assets grew sevenfold in just two weeks. Furthermore, COMP's launch acted as a catalyst for the entire DeFi ecosystem, with over $500 million flowing into various DeFi protocols in the following week.
Balancer's BAL Token
Following suit, the decentralized exchange Balancer launched its governance token, BAL, on June 1. It employs a "liquidity mining" model, rewarding users who provide liquidity to its pools with BAL tokens. Upon becoming tradable on June 23, BAL's price started at $6.95, peaked at $21.6, and has since found support around $10.19. This token incentive propelled Balancer's total value locked (TVL) by an astonishing 1280% in a month, allowing it to overtake Uniswap as the largest decentralized exchange by TVL.
The DMM Ecosystem
Adding to the trend, the DeFi Money Market (DMM) project launched its governance token, DMG, on June 22. The platform, which offers lending services backed by real-world assets like automobiles, successfully sold 15.7 million DMG tokens, raising $6.8 million. The immense financial success of these initial token launches is fueling expectations that this trend will continue as other projects seek similar growth and funding.
Why Are DeFi Projects Launching Tokens Now?
Several key factors are driving this concentrated wave of token generation events (TGEs) within the DeFi space.
Delivering Value to Investors
A primary motivator is the need to provide an exit or value realization strategy for early investors. For instance, 23.96% of COMP tokens were allocated to Compound's investors. Similarly, 25% of BAL tokens are designated for Balancer's investors, founders, and developers. A token launch offers a liquid asset that investors can trade, representing a return on their early faith and capital.
Achieving Liquidity and a "Cold Start"
Token launches serve as a powerful mechanism for bootstrapping both a user base and ecosystem liquidity. The promise of earning valuable tokens acts as a massive user acquisition tool. As evidenced by both Compound and Balancer, projects can experience exponential growth in users and business activity immediately following a token launch, effectively solving the classic "cold start" problem.
Riding the Market Wave
The perception of DeFi as a major market trend, or "风口" (fengkou - wind mouth), is another powerful driver. Projects are rushing to launch tokens to capitalize on this bullish market sentiment and secure crucial operating capital. There's a prevailing fear of missing out (FOMO), as teams believe that delaying a token launch could mean accessing significantly less capital later if market conditions change. Projects with existing revenue streams, like the leveraged trading platform dYdX which charges transaction fees, may feel less pressure to launch a token immediately.
The First-Mover Advantage
The current DeFi landscape, particularly in crowded sectors like lending, suffers from significant homogeneity. Many projects offer similar services. In such a competitive environment, a token launch creates a powerful first-mover advantage. Early projects that launch tokens benefit from massive attention and capital inflows, making it exceedingly difficult for later entrants to replicate their success, regardless of their technical merits.
The scale of financial success is undeniably persuasive. While an established player like dYdX might generate a few million dollars in annual revenue from fees, Compound achieved a multi-billion dollar valuation through its token launch in a matter of weeks. This stark contrast is a compelling argument for launching a token.
Furthermore, this trend represents an evolution from the Initial Coin Offering (ICO) era. Unlike ICOs that often raised funds based solely on a whitepaper, most modern DeFi projects launch a functional product first and then introduce a token to decentralize governance and incentivize usage. This "product-first" approach is widely seen as a more mature and sustainable model.
Sustainability and Future Challenges
Despite the excitement, a cloud of skepticism hangs over the sustainability of these valuations, primarily due to questions about value accrual for the tokens themselves.
The "Governance Token" Dilemma
Most DeFi tokens, like MKR and COMP, are classified as governance tokens. Their primary utility is granting holders voting rights on proposals related to the protocol's future development. Crucially, they typically do not confer any rights to a share of the platform's revenue or fees (dividends). This design is intentional, largely to avoid being classified as a security by regulators like the U.S. Securities and Exchange Commission (SEC). The ghost of failed projects like FCoin, which tried and failed to maintain a token with dividend-like mechanics, also looms large, making teams cautious.
Questioning Market Valuation Metrics
Many experts argue that traditional market capitalization metrics—calculated as circulating supply multiplied by current price—are misleading for these new tokens. Because a large portion of the total supply is often locked and not actively traded, the float is small, making the price—and thus the market cap—highly volatile and susceptible to manipulation.
A more accurate measure might be the realized capitalization. This metric calculates the sum of the value of all tokens at the price they were last transacted for. For a new token where many coins were acquired at low prices and haven't been moved, the realized cap can be significantly lower than the reported market cap, suggesting that the paper valuation is vastly inflated compared to the actual capital invested.
The "Market Cap to Total Value Locked" Ratio
Another method for evaluating DeFi projects is to compare their market capitalization to their Total Value Locked (TVL)—a metric analogous to the Price-to-Earnings (P/E) ratio in traditional finance, sometimes called the "Market Cap to Deposit" ratio.
For perspective, a major traditional bank like Industrial and Commercial Bank of China (ICBC) has a Market Cap/Deposit ratio of approximately 0.09. In contrast, the overall DeFi sector currently has a TVL of around $16.2 billion against a collective market cap of roughly $61 billion, resulting in a ratio of 3.76. This implies the DeFi market is trading at a premium over 40 times higher than a major global bank, indicating potential overvaluation.
The Double-Edged Sword
A token launch is a powerful tool but also a double-edged sword. While it provides immediate capital, attention, and users, it also creates expectations. If the high valuation is not eventually supported by fundamental utility, cash flow, or sustained user adoption, the bubble risks popping. If token holders do not perceive long-term value, whether through governance influence or other means, confidence can collapse rapidly.
The founder of Compound has stated that the protocol would continue to function even if the COMP token's value fell to zero, highlighting that the token is separate from the protocol's utility. However, for investors who purchased tokens at high prices with real capital, this is little consolation. 👉 Explore advanced DeFi market analysis tools
Frequently Asked Questions
What is a DeFi governance token?
A governance token gives its holder the right to vote on proposals that dictate the future development and changes to a decentralized protocol. It allows for community-led decision-making but typically does not provide a share of the project's revenue, often by design to navigate regulatory uncertainty.
Why are so many DeFi projects launching tokens now?
The current wave is driven by a combination of factors: providing returns to early investors, bootstrapping user growth and liquidity through incentive mechanisms, capitalizing on a bullish market trend, and establishing a first-mover advantage in highly competitive sectors of the DeFi ecosystem.
How is "liquidity mining" different from "lending to mine"?
Both are incentive mechanisms. "Liquidity mining" rewards users who provide assets to a liquidity pool (e.g., on a DEX like Balancer). "Lending to mine" (or "borrowing to mine") rewards users who either deposit assets to lend or take out loans on a lending protocol (e.g., Compound). Both distribute native tokens to participants.
Are DeFi tokens a good investment?
They are highly speculative and carry significant risk. Their valuations can be extremely volatile and may not be supported by traditional financial metrics like revenue. While some tokens have generated enormous returns, their long-term value depends on the sustained growth and utility of the underlying protocol, which is unproven for many projects.
What is Total Value Locked (TVL) in DeFi?
TVL represents the total amount of capital (in USD) that is currently deposited and being used within a DeFi protocol or across the entire DeFi ecosystem. It is a key metric for gauging the health and adoption of a protocol, similar to assets under management (AUM) in traditional finance.
Could DeFi token launches lead to a crash like the ICO boom?
While the "product-first" approach is an improvement over the ICO model, the risk of a correction remains. High valuations based on speculation rather than fundamentals, intense competition, and regulatory challenges could lead to a market consolidation where only the strongest protocols survive, potentially wiping out value for many tokens.