Sep 12, 2020 16:43 UTC
Sep 12, 2020 at 16:43 UTC
Why DeFi, in its Current State, is Designed to Fail
Decentralized finance, in a shell, promises transparency and offers helpful terms for borrowers. DeFi platforms are supposed to shape an alternative financial system for offering/receiving loans, to exchange currencies, to make payments, etc. There are no banks, brokers, or trusted third parties, governments are not tangled, & finally, notorious intermediaries are eradicated. There is just secure, straightforward software.
DeFi permits borrowers to take hassle-free loans: You don’t have to worry about bank account creation, lengthy application reviews, or paperwork. For crypto holders, DeFi offers a chance to lend their assets to other users, thus earning a profit of about 20 per cent. Decentralized exchanges often act as custodians of funds, thus eliminating that annoying middleman again. This is how DeFi should work and probably will work someday. And what trails are the actual current situation?
What’s wrong with DeFi in its present state
Decentralization is the right word. The philosophy behind it is rather romantic, or in more simple terms, utopian: a world without standing order & rules imposed by archaic governments, organizations, & banks. All are managed by a community of enthusiasts who consistently worship transparency. Nothing is terrible with this one.
The issue is that such thinking can consequence in anarchy, which many contemplate a desirable backdrop to the “new world” but not when it comes to personal finance and savings. Here, we still crave at least some order and rules of play.
And that’s when the tricky part of DeFi emerges: the disregard of regulations and Know Your Customer/Anti-Money Laundering procedures. This leads to a high risk of money laundering via liquidity pools. And make no mistake, the United States Securities and Exchange Commission will notice such activities pretty soon. There are too many DeFi projects that scream “bubble” but for general users, it’s tough to crack down on such frauds. So, severe sums of money could be gone.
Why I held in DeFi, & what I’ve educated
We don’t trust in DeFi in its current state. In the initial, when we were a peer-to-peer platform, things looked diverse. But we hurriedly understood that prospects are blurry for the current version of DeFi. Solitary centralized lending platforms have a promising future, and they have proved their credibility already. They offer greater functionality & speed, and they’re easy to understand & use, & rates are fixed for borrowers, whereas lenders can earn fixed interest on their deposits.
DeFi functions in an extremely volatile, unpredictable market. It’s not user-friendly, despite all those claims we keep hearing. Smart contracts, self-managed crypto wallets how accustomed are general users with these terms? And I don’t even have to remark the number of bugs and glitches on decentralized platforms.
What’s happening today is a perfect instance of good old hype the promotional machine with “maximum power” mode on. There is heaps of noise & unfounded praise, but if you scratch the surface a bit, you’ll see that only up to 30 per cent of assets are working within DeFi. Non-DeFi, or centralized finance, projects have up to 80 per cent of assets working. That’s some variance.
To be more exact, though, transaction fees are ridiculous, and they alone almost nullify all existing DeFi aids. The price of executing an operation in DeFi could be as high as $100. It doesn’t make any sense to use unless you’re playing with crazy big money.
Why is it happening? Well, because that’s precisely how a boom or hype works! DeFi exploded lately, resulting in Ethereum network overload. Henceforth, transaction costs have gone through the roof, and suddenly, what claimed to be available for everyone is not!
The foremost risks for those who interact with DeFi podiums now
The core risk is a smart contract vulnerability. One “glitch” can lead to the stalling of all assets, or even to the loss of funds. There are lots of instances, from The DAO to the new hacking of DeFi platforms. In the latter case, oracles, which supervise prices, were responsible for cheating and fund extractions from smart contracts.
One more risk is an inevitable human error. Designers can claim their codes are invincible, but they can’t superintend how each user interrelates with applications and platforms. We’ve all gotten stories of funds being lost due to a mistake in an address.
The marketplace is still very random, and there is almost no insurance available for investors. So, the risk of losing significant funds is very high.
And of course, there is the additional buzzword, “yield farming” which stands behind the explosion of DeFi. In humble terms, yield farming means the creation of tokens to reward users who deliver liquidity to a project. The trick here is that users have to invest their tokens into the project, and consequently, they’re unable to trade or sell those tokens. More & more tokens are involved in DeFi because tall yields are offered, and people want quick profits, but this unavoidably leads to reducing the supply available for trading. Yield farming feeds the bubble.
As I stated earlier, at the instant, it looks like the hype was created by initial coin offerings in 2017. Masses of people were tempted by ready-to-grab “opportunities” and lost their money in the end. With DeFi, though, the risk is more significant: You can lose all savings, not just some free bucks.
Who, or what is behindhand the DeFi hype?
Herd instinct is behind it, nothing more. It’s powerful in the crypto communal, I should say. Mass hysteria occurs every time a tweet from some “evangelist” is posted. So, there are no surprises here. Similarly, DeFi tokens have a low capitalization rate compared with Ether (ETH) and Bitcoin (BTC), and it’s straightforward to increase prices on them.
Lately, Ethereum co-founder Vitalik Buterin mentioned on DeFi tokenomics:
“Seriously, the sheer volume of coins that needs to be printed nonstop to pay liquidity providers in these 50-100%/year yield farming regimes makes major national central banks look like they’re all run by Ron Paul.”
Nevertheless once the hype is over, look out for the collapse of DeFi tokens — it’ll be rather dramatic. Longing quick, high profits, people will lose money, gloomily. Greed is a dangerous “driver.”