DeFi Revisited

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It was a brutal spring for crypto’s darling, but now it looks like DeFi might be ready for primetime.

When I wrote about the DeFi phenomenon last August, it was still a space of chaos and enchantment, where new projects were launching and exit scamming on a daily basis and Twitter profiles with anime avatars kept posting about the ungodly amounts of money they were making through mysterious practices such as yield farming, liquidity collateralisation and flash loan asset tokenization.

As the half-life of these new projects reduced from weeks to days to hours, the stage was set for a violent collapse and, well, that certainly happened in September. The lucky projects lost 80-99% of their value in a matter of weeks. The less lucky/dumber ones went straight to zero.

Cut to three months later and (in proper hyper-accelerated DeFi fashion) it increasingly looks like the sector has gone through a full-blown crypto bear market and is now primed for another, even bigger bubble. But as the valuations soar, it’s worth asking: has anything changed or is this just another case of crypto-being-crypto?

A quick refresher

If you have absolutely no idea what any of the above meant, then, well, you’re not alone. Even by the conceptually complex standards of the crypto space, DeFi often feels wilfully abstruse. But beneath the barrage of new terminology and incomprehensible memes (take, for instance, this recent announcement video for major player Yearn Finance/YFI) there is something fundamentally interesting going on.

If you had to reduce the DeFi project down into one word it would be: loans. Basically, how can someone who has money lend that money to someone who wants it without a bank getting involved?

From there, things get pretty convoluted pretty quickly. But essentially it’s all about creating self-sustaining, decentralised money markets where people who have coin X can lend them to person Y in return for interest.

There are three major things that set these money markets apart from their traditional counterparts:

  1. They are readily available to (essentially) every person in every country on Earth.

  2. With the banks out of the picture, these markets can typically offer lenders interest rates of at least 8% and often far higher.

  3. The pace of change and innovation is exhilarating, if not outright bewildering.

Risk and reward

If bitcoin is an assault on our preconceived ideas of money and value, then DeFi can be seen as a broadside on the entire global banking system. Yet as a field, it’s still in its infancy and that means the risks – as well as the potential rewards – are significant.

Back during the 2017 ICO boom, there were plenty of scammy projects, but they were vaguely constrained by still primitive crypto wallet infrastructure and the fact that most of them never went near a popular/reputable exchange.

The DeFi boom, however, is being powered (appropriately enough) by the decentralised exchange Uniswap. Built on Ethereum’s smart contracts, Uniswap allows anyone with even the most basic blockchain abilities to offer a coin for trading. The pump’n’dumps of 2017 have been replaced by “rug pulling”, where developers clone an existing DeFi project, stir up a lot of hype by offering outrageous returns and then when the price has jumped high enough, sell all their tokens and leave everyone else with a dead asset worth precisely zero.

Practice safe trading

At CoinJar, we’ve added a number of DeFi assets over the last few months because we believe this is a transformative technology that could shape the crypto market for years to come.

But the assets we’ve chosen so far – UniswapYearn.financeCompoundMakerChainlink – are all battle-tested projects with respected, public-facing teams and proven, working products.

DeFi is here to stay but (as always in crypto) only a handful of projects will thrive in the long run. Rest assured, we’ll always do our best to make sure the coins we choose are those best positioned for success, which means you can sit and admire your rug in peace. It really ties the room together, y’know?

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