Since May, Ethereum has outperformed bitcoin, largely due to the decentralized finance (DeFi) frenzy, which saw numerous DeFi tokens with unaudited code and sometimes anonymous founding teams, boom in price.
Some analysts even posited that the most recent rally in digital asset prices was initiated by Ethereum rather than bitcoin’s growing utilization as a store of value asset.
Unfortunately, last week, the macro environment changed when the dollar spiked unexpectedly and equity markets plunged the furthest since March. The sudden risk-off environment, coupled with the speculative fever provided the perfect kindling for a sharp sell-off in digital assets like $ETH.
As mentioned in prior posts, the DeFi frenzy had a positive price feedback loop to $ETH, which would be disrupted when the “party” came to an end. Furthermore, anyone who has seen a speculative bubble before, especially those that witnessed the 2017 frenzy, knew that the DeFi bubble would end poorly. Enter — SushiSwap.
SushiSwap was founded by an anonymous individual, Chef Nomi, who forked the UniSwap decentralized exchange (DEX) and created a governance token called $SUSHI to bootstrap liquidity on the network. $SUSHI was one of the hottest tokens in DeFi, increasing from a $600,000 market cap to a peak of $285 million in two weeks.
Unfortunately, per Glassnode, “After repeatedly promising not to sell the 10% devshare portion of $SUSHI tokens, designed to fund the continuous development of the network, this Saturday, in a single transaction, Chef Nomi liquidated the developer wallet, netting 38,000 $ETH or nearly $12.5 million.”
News of the transaction caused the $SUSHI price to plummet from $4.12 to a low of $1.19, coupled with a public outcry that SushiSwap was an exit scam by Chef Nomi. However, Chef Nomi denies the allegations and likens his situation to when Charlie Lee sold his $LTC, i.e. sold in order to stop caring about price and instead focus on development.
Regardless of Chef Nomi’s true intentions, their actions may have irreparably damaged the SushiSwap project, which is weighing on Ethereum price.
For example, once macro uncertainty hit the markets and token prices dropped, DeFi speculators like Chef Nomi ran for the exits to preserve their capital which initiated further declines. The aforementioned panic selling reversed the previous feedback loop from positive to negative, thus the SushiSwap situation could have lingering consequences for the DeFi and Ethereum communities.
The fallout is still unfolding, but the Ethereum and DeFi communities are likely to take this lesson to heart and make the appropriate adjustments moving forward.
Only time will tell if the aforementioned adjustments are enough to re-initiate the roaring bull market seen over the previous 3 months.
Disclosure: The author owns bitcoin and ethereum.