DeFi: What are the risks and opportunities?
DeFi or Decentralized Finance has come to offer an opportunity to traditional finance and lead them towards the concept of decentralization.
Cryptocurrencies were the first step and DeFi or Decentralized Finance the next link in the chain of decentralization of the economy. They have even surpassed the market capitalizations of the main cryptocurrencies in the market.
They, together with smart contracts, have removed the need for the typical middlemen in loans or swaps. It is a new way of providing financing away from the traditional guidelines of the big banks.
But not everything is rosy, but since the ICO Boom in 2017 there have been many scammers looking for unsuspecting investors. Any blockchain could be a feasible project with just a White Paper, a website and, of course, an ICO.
A bit of DeFi history
According to DeFi Pulse website, DeFi starts in 2017 with a total value locked or TVL of just $4. Already on September 11, 1 million dollars had been blocked. Projects like MarkerDAO, DAI or ETHLend (AAVE) had appeared. By the end of that year, 45 million dollars had already been blocked.
2018 was a bear year for cryptocurrencies and many sought refuge in holding or keeping their holdings off the market. But they saw an investment opportunity in DeFi and invested in the sector, locking up $150 million in June of that year. In December they reached 295 million dollars in countless projects.
The arrival of the ICO boom
With the recovery of the cryptocurrency market in 2019 came the so-called ICO boom and in June the TVL increased to 570 million dollars. Lending platforms, liquidity pools and decentralized exchanges or DEX gained traction as they saw a promising future in DeFi Development.
At the end of 2019 the TVL reached 690 million dollars and at the beginning of 2020, with the ongoing pandemic, it reached 1.02 billion dollars. But in early March it was cut in half. Although twelve days later an upward trend began that again boosted the market. In October 2020 it reached 11 billion dollars.
What are the opportunities?
DeFi Development Services came with the proposal to bring financial tools to everyone without major difficulties, in an open and decentralized way. Until then, everything has been fulfilled and today cryptocurrencies can be used more than to hold. It expands their worth and gives new chances.
The value of Bitcoin and Ethereum has flown in tandem with the DeFi boom.
In addition, they are an excellent opportunity to promote blockchain technology beyond its initial functions.
What are your risks?
This growing interest has also been the niche for multiple scams around this promising financial technology.
Hackers have taken advantage of the vulnerabilities of smart contracts, blockchains or libraries, dressing under the guise of being DeFi revolutionaries to catch the unwary.
But it is not only the risk of digital criminals, but also that we are dealing with a new experimental technology and that it can fail.
Keep in mind that cryptocurrencies have only been around for a little over ten years and are continually being developed.
What are ponzinomics?
DeFi Development Company is often considered a ponzi scheme or ponzinomics. Since they use certain economic strategies that are applied in the aforementioned scheme. This has aroused concern in the sector that sees these practices proliferate in the sector.
Vitalik Buterin, founder of Ethereum, has expressed himself in this regard. 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 4,000,000% per year), and rewards for amassing fortune in said protocols are warning signs of this types of strategies that Buterin has highlighted.
Since the tokens received have no use beyond the platform and their value is merely speculative.
We consulted our expert and professor in the Bitcoin, NFT and metaverse investment course Javier Molina, for some examples and advice on investing in DeFi.
-What case could you highlight of a scam using DeFi?
A scam is not the same as a “hack”. It is one thing to violate the security of a protocol and another to take advantage of the existing "noise" and hype through a scam. For example, while the Poly Network "hack" is the biggest to date, with 611 million USD, in the case of scams as such, what happened with Squid Game seems important to me so that investors do not fall.
-Has there been any other blockchain expert besides Buterin who has spoken out about DeFi scams?
It is an issue that is associated with innovation. We are discovering a new way of doing things, finances, and that always generates good and bad situations, where there are individuals trying to take advantage of the moment from the negative side. I think we should all be aware and talk not only about the good, but also about the risks.
-What advice would you give us to avoid falling into a ponzinomics?
The first thing is to educate yourself. Not only the usefulness of the project but also the variables that influence this ecosystem. Secondly, you have to do internships with very low amounts, understand the dynamics, the flows... that there is no return without risk and that risk must always be put first. Third, always have a strategy. Fourth, always run away from promises, influencers and those who try to get us into a project.