DeFi: Legitimate Enterprise Or The Second ICO Craze?
Introduction: The Intricacies Of DeFi
Decentralized Finance is a relatively new phenomenon within the cryptocurrency and blockchain ecosystem and has stirred excitement, controversy and monetary behaviors reminiscent of the 2017 ICO Craze. So what is DeFi and how does it work; it is incumbent to answer this question before analyzing how to understand the benefits of specific DeFi projects. Decentralized Finance, in short, is a new concept within the cryptocurrency and blockchain sphere that is an experimental paradigm of peer-to-peer financial networks running on specific blockchains: most notably on Ethereum.
At its inception, many DeFi projects were built on Ethereum, however, as the DeFi ecosystem has grown at a rapid pace, applications, token paradigms, cryptocurrency and blockchain projects have utilized DeFi to enhance or expand their ecosystems. Decentralized Finance is an extremely enticing monetary venture because many of these applications and projects, similarly to staking your coins and earning rewards at high interest rates, also offer very high interest rates. These monetary opportunities can seem enticing to the novice investor but it is crucial to analyze the intricate components of these newly formed projects. Yield farming is another intricacy of Decentralized Finance that entices new investors through putting your assets in a pool to generate APY growth to your investment.
Monetary Discussion: DeFi Monetary Ventures
Monetary ventures within DeFi that perpetuate a high yield interest rates are extremely enticing, as human beings are creatures of self-interest, we have the insatiable desire to grow our monetary investment as quickly as possible, and DeFi emphasizes this notion. By October 2020, over 10 billion dollars has entered the DeFi blockchain space and in September 2020, Bloomberg created a study analyzing monetary statistics entering the DeFi market; they found that DeFi made up almost two-thirds of the cryptocurrency and blockchain markets and collateral levels within the realm of DeFi reached over 9 billion dollars; in a little over 4 months, these are staggering statistic that perpetuate the nostalgia of the ICO Craze. DeFi allows for numerous decentralized applications built upon blockchain networks to perform specific monetary functions like lending, borrowing, earn interest, trading cryptocurrency and many other functions. From August 2020 to September 2020, the amount of money that has entered the blockchain DeFi sphere has doubled in size; although this looks like an incredible venture, it is incumbent to analyze how to empirically differentiate a strong DeFi project with legitimate fundamentals and those that are just out for a money grab. Lets analyze this notion.
Differentiated Notions: DeFi, The Nostalgia And Reminiscence Of 2017
Before I move on I have to say that this isn’t financial advice, with any asset, including DeFi and digital assets, please do your own research. When observing the analytics of numerous different DeFi projects, Coindesk found that most DeFi projects aren’t distributed on a broad scale, in fact, they found that most DeFi coins (99%) were held by top 500 addresses, perpetuating the barrier of entry and a newly formed “digital economic inequality.” However, this barrier of entry doesn’t outline the immense amount of returns that investors can make through yield farming; for example, projects like YFV Finance offer 14 pools that generate almost 25% in rewards; to put that in perspective, if you invest 1000$, you will be generating 250$ in rewards. Compound Finance is another project that has accelerated the adoption of blockchain DeFi for numerous reasons.
To begin, COMP was listed on Coinbase, Poloniex and Binance and saw a staggering increase in price valuation (approximately 600%) in returns and over 800 million dollars are currently locked up within this ecosystem. With that said however, proving the point of intense amount of risk, COMP has gone from approximately 352$ in price valuation to, at the time of writing this article, to 82$ in price valuation, more than a 400%, which emphasizes the high risk potential in these newly formed assets. Similar to the fate of COMP’s price valuation, YFV went from a price valuation of $67 on September 1st to $2.65 with a mere 1.6 million dollars of 24 hour trading volume, down from nearly 130 million at its all time high. Yearn Finance, another DeFi project, hit an all time high of approximately $43,000 a token, yes, this coin was more than triple the price of Bitcoin and now, it is trading at approximately $9,300 dollars. Coins such as SushiSwap as well has garnered massive controversy when the community out cried that the creator exit scammed with over 14 million dollars, and through doxing and constant threats, the individual returned the 14 million dollars to the community and stepped down (mind you Binance listed this token as well, which put the largest exchange in blockchain under massive scrutiny). Are you seeing a pattern here, I don’t want to speak in universalities but DeFi, though it has massive potential for high interest returns and lending, borrowing and collateral surrounding decentralized payments, the coins themselves are extremely risky and the price valuation of these tokens over the last 2 months speak for themselves. With that said however, there are numerous strong projects that have entered the blockchain space that, in my opinion, have massive potential, these projects being Chainlink and Band Protocol.
The Interconnectivity Of DeFi: The Chainlink And Band Paradigm
Chainlink and Band Protocol have specifically garnered attention over the last few months, specifically because of the rise of DeFi. Chainlink and Band have scaled use-cases in the DeFi space; DeFi applications have become majorly reliant on these protocols to connect on-chain DeFi smart contracts to off-chain data feeds for example, commodity prices and real value price data. Projects such as Kyber Network, AVA, Graph Protocol and ICON have all integrated Chainlink’s oracles. Dforce has also partnered with Band Protocol o secure unified DeFi networks in their protocol, similarly, NUTS Protocol has integrated BAND for their decentralized product sweep and Tron has also integrating Band’s technology as well! Chainlink specifically has been building and forging partnerships over the course of three years; specifically, Chainlink has been around since the third quarter of 2017, proving the notion that this project specifically has been building throughout the Great Bear Market of 2018–2020, solidifying its position as a leader in the DeFi and blockchain space as a whole. Although Band has only been available for a little over a year, they have solidified numerous partnerships that emphasize the validity and stability of this project. In my personal opinion, this is how you differentiate weak and more risky DeFi projects from strong consolidated DeFi projects: solidifying partnerships, immense integration, cross-chain compatibility, (interoperability must be consolidated within blockchain for mainstream adoption to occur, how can their be adoption if these blockchains can’t communicate) and an active community. Chainlink and Band have all of these collective functions within their networks, which in my opinion, are why they’re leaders within the blockchain ecosystem.
Conclusion: A High Risk High Reward Proposition: The Paradigm Of DeFi: An Amalgamation Of A Bubble And Innovation
It is evident that DeFi has both innovative and monetary prospects that will propel the blockchain ecosystem to new heights, but simultaneously, within this paradigm of innovation, various bubbles exist which have been proven true by the immense drop in price valuation that we have seen in numerous projects. On a personal note, I don’t doubt the validity of DeFi at all and I think the immense amount of excitement speaks for itself, but with human emotion comes human greed and avaristic intent. Many projects have come under communal scrutiny while other projects have flourished in the DeFi space and many decentralized applications that support and emphasize DeFi are being created on a consistent basis. It is incumbent for all investors, both old a new, to weigh the high risk and high reward potential of these new assets and decentralized applications that provide high interest rates, but what expense, and this is something worth looking into extensively.
Disclaimer: Cryptocurrency investing requires substantial risk, do not invest more than you can afford to lose! I am not a financial adviser and I am not responsible for any of your trades. I do not own any of the cryptocurrencies listed in this article and I never have. The cryptocurrencies listed in this article didn’t sponsor this article and this article is purely based on personal opinion of my own empirical experience. It is incumbent that you always do your own research before investing in anything!
