The DeFi Boom or DeFi Explosion is something we are experiencing, and for which you must know the good and the bad of this moment, like the ICO Boom, there are opportunities to make money, but also many dangers to lose it all.
DeFi is assuming a revolution because many intermediaries in financial products such as loans, exchanges, credits are being eliminated. All of this through smart contracts, being all transparent and eliminating access barriers that allow its use by anyone with an internet connection.
But it's not all that pretty in the DeFi world, and like all new trends there are scoundrels who prey on newbies. To the acquaintance "DeFi Boom" the opportunists have also arrived. Yes, those who promise you heaven, but put a blindfold on you and give you a ticket with no direct return to hell of economic losses.
That's right, scams, thefts, useless protocols, and pointless ideas also abound in the DeFi world. And in fact, they are growing at a worrying rate. Suffice it to say, there are more protocols that seek to keep your money than those that really offer you real value.
In this sense, let us ask you something Is all this familiar to you? Surely those who have been around cryptocurrencies for a few years will say yes. That event similar to what we live in DeFi, we live it with the call "ICO boom". And it is that 2017, was the year of the ICOs, where the ICOs promised to take over the entire Universe. Everything, all of a sudden, had a blockchain solution, everything was a feasible project and to make it happen all you needed was a PDF called whitepaper, a cheap website and an ICO.
But not only with ICOs, previously it happened with clones of Bitcoin and the appearance of projects that only copied and pasted their code. The same happened with the cloud mining, and later to ICOs, masternodes, and now DeFi. They are trends that are generated after the real success of some projects, and where opportunists quickly emerge.
However What exactly are we talking about when we talk about the DeFi boom? Let's know a little more about this.
The DeFi Boom
The web DeFi Pulse is perhaps one of the world's most recognized economic news media DeFi today. On this website, we can see that the history of the DeFi ecosystem begins in 2017 with a locked value of only $ 4. Yes, only $ 4 was locked in DeFi protocols as of August 2, 2017. It all seemed like DeFi was a crazy idea, with little future ahead of it.
However, by September 11 of that same year, DeFi already had more than $ 1 million blocked. At that time, projects such as MakerDAO and DAI, ETHLend (now AAVE) and things began to improve. Thus, by the end of 2017, the value locked in DeFi had reached 45 million dollars. In just 5 months, it had gone from nothing to a multi-million dollar business, and it was just getting started.
The year 2018 was a difficult year for the crypto world. The start of the bear market (a market with falling prices) led everyone to seek safe haven in hodling (keeping their cryptos). Others, however, ventured into the new proposal, the DeFi promised to give you profits, minimal, but profits in the end, even in the worst case. Y What better than to generate profits in the middle of a bear market that causes the crypto markets to sink? Definitely the idea is better than waiting for your coins to dilute their value, and in any case generating even a few additional tokens was not going bad, especially if you could hodle while waiting for the next bull market (market with rising prices).
The truth is that the idea caught, and by June 2018, DeFi was already blocking a total of 150 million. Not bad, a growth of 3 times its value in 6 months. In December 2018, the market closed with $ 295 million blocked, and a growth in the number of projects. It was there that DeFi started making a lot of noise. And, although their returns were quite small, they were still returns in times of drought (speaking of the active bear market at that time).
The arrival of the boom
Arriving in 2019, many expected signs of recovery in the bear market, and many already saw it coming. The DeFi world for its part was taking hold with new protocols and ideas. Thus arrived June 2019 and the 570 million blocked in DeFi already clearly demonstrated something: DeFi is here to stay and seemed to want to grow bigger. There it became the buzzword, lending platforms, liquidity pools, decentralized exchanges that were gaining more and more traction, pointed to DeFi becoming relevant in the future of cryptocurrencies and blockchain technology.
By the end of 2019, it had $ 690 million locked up, but on February 5, 2020, DeFi became a billionaire. To be exact, with $ 1,02 billion locked up. However, the joy for DeFi fans did not last long, as the market correction between mid-February and early March 2020, took it to half that value.
Despite this, on March 12 everything changed. DeFi entered an uptrend, and its locked value began to grow. As of today (October 2020) it has not stopped growing, going from 562 million to over 11 billion dollars. Many believe that the market will continue to grow, and because of the winds that blow, it seems so.
At this point, protocols like MakerDAO, Uniswap, Compound, AAVE, Yearn Finance, Balancer, Curvehave played a fundamental role in the consolidation of this sector. They have become the spearhead of the DeFi sector and have maintained that place in the middle of a sector that changes every second. Now, all is certainly not perfect in the DeFi world. For that reason, here we will examine the risks and opportunities presented by this new sector of the crypto world.
Opportunities in the DeFi Boom
On the one hand, the DeFi or Decentralized Finance ecosystem came with the promise of allowing access to financial tools for everyone, without major difficulties and, best of all, in an open and decentralized way.
At this point, the DeFi has (to some extent) met its target. Financial tools have been developed, access is free, decentralized (some projects), and it works. This allows the money represented in cryptocurrencies to be used for more than just making HODL, generating economic opportunities for those who need them, creating new use cases, and increasing their value.
Let's see it this way: the more use large cryptocurrencies have, the greater dynamism will be and this will have an impact on the escalation of their value. We already see it today, Bitcoin and Ethereum have been two currencies whose prices have fluctuated a lot in the middle of the cryptocurrency boom, and in fact, their prices have consolidated in the middle of the DeFi boom. This reality will not be different for other currencies that take advantage of DeFi to revalue and gain space.
On the other hand, DeFi is an excellent opportunity to push blockchain technology beyond its fundamental niches. In 2013, it was a dream to have decentralized mechanisms to handle loans like the ones we have now. In fact, it was still a dream to provide financial opportunities for the unbanked population like those presented by DeFi today. Yes, Bitcoin allowed you to send money to the edge of the Universe safely, but it does not allow you to make collateralized loans, at a stable price, on a decentralized and secure platform only using Bitcoin.
How much do you know, cryptonuta?
Does the Proof of Authority meet a decentralized consensus scheme?
Proof of Authority (PoA), unlike PoW, follows a centralized distribution scheme. This together with its low energy impact make it ideal for private blockchains.
The Risks of the DeFi Boom
But since everything has its bad side, DeFi could not be the exception. With the growing interest in this technology, the eyes of the world's malicious actors have fallen on it and everything related to it.
From hackers who spend hours looking for vulnerabilities in smart contracts, blockchain platforms, libraries or any possible means that gives them access to the enormous amounts of money that these protocols handle, to professional scammers who improve their strategies, dress up as businessmen with a revolutionary DeFi idea, to make its victims fall into a vile robbery.
These are just a few ways, which we already know in the crypto world, we know well, and we fight against them all the time. In fact, in the ICO boom we saw a lot of this and learned a lot about how to identify and get away from these tricksters by trade.
But what about the new risks that come only from the DeFi world as such? There the problem is more complex, because DeFi is a totally unknown new world. This is all new, even the most bank-like platform in DeFi is something new, completely experimental, and therefore can fail.
It can fail not only because its principles are poorly constructed, but because the same platform is built on experimental and developing technology.
Yes, 11 years after its construction blockchain is still a technology under construction, but even so, it is the best we have in the face of centralization and its model with millennia among us.
On the other hand, perhaps one of the biggest risks of DeFi is that it serves to build structures that end up destroying trust in the blockchain. The arrival of protocols such as YAM or HOTDOG are an example of this case. Raising an idea as the greatest exponent of DeFi, capturing people's attention, making them invest and from there realizing that what they have sold is smoke, erodes trust in these projects and the blockchain.
Of course, the blockchain is not to blame for this, much less bad investment decisions, but painting a technology black can help kill it and there are many interested in it.
Ponzinomics, it looks like the ponzi, but it isn't
One of the most curious points of DeFi (and of many of its projects) is its resemblance to a Ponzi scheme, in what they call a strategy "Ponzinomics". To keep things simple, Ponzinomics is an economic strategy used by certain projects supported by aspects of a ponzi scheme, but deep down, the system is not.
Something like: "I use ponzi strategies, but don't worry, I'm not a ponzi". This has raised doubts on the part of some people in the crypto community. Especially since they view with concern how these strategies have become very common in the DeFi world. In fact, the DeFi boom is due in large part to this type of practice. For that reason, from Bit2Me Academy we have decided to make a special section for this risk due to how diffuse it is, and clearly explain why this is perhaps the worst risk of all in the DeFi world.
We are all well aware of the dangers of a ponzi scheme, fraudulent schemes that give profits out of the money of other people who enter the scheme.
Vitalik ButerinLately, he has been giving opinions on Twitter regarding DeFi and its excessive growth. Facts such as the lack of transparency of some protocols, the excessive growth of their value, granting interest rates of up to 90% per year (and some up to 4 million% per year), and rewards for amassing fortune in said protocols, are signs of alerts of this type of strategies. In fact, many see in the liquidity mining this type of practice, since the tokens received as a reward have no real use beyond the platform and their value is merely speculative.
At this point, it is clear that these types of schemes are not healthy, and projects that focus their operation on these types of strategies are dangerous. That is why from Bit2Me Academy we make the following recommendation:
Analyze the project VERY well. Observe and learn how it works, look at your community and above all understand the benefits and risks that it can give you. This is the best way to protect yourself from the “worst case scenario” and at the same time it can give you the best strategy to enjoy DeFi with the least possible risk. If you don't have the ability to understand where you put your money, DON'T DO IT.