The DeFi wave or bubble?

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Avatar for arslankhalid
2 years ago
Topics: Ethereum, Defi

The concept of DeFi was first proposed in August 2018, but it emerged from 2019 to 2020. Recently, it has become a climax due to activities such as liquid mining, IDO, and DEX, which once occupied the heads of major forums, communities, and media.

Why is DeFi on the rise?

1. Blockchain ecology

In today’s rapidly developing and ever-changing blockchain industry, any project or thing that is actually useless, has no application scenario, or has no real value, even if it becomes the center of attention due to some accidental or human factors, or the price increases for a short time, it will eventually be a bubble Such a short-lived phenomenon will be quickly swallowed by more valuable things in the historical torrent of the blockchain. From the development timeline, DeFi obviously does not belong to this category.

The concept of "decentralized finance" itself is advanced, and it is not an exaggeration to describe it as a "revolutionary" finance that challenges the current financial ecology. DeFi applications can not only make up for some of the shortcomings of centralized finance (high cost, low efficiency, and complicated process), but also supplement some of the functions of existing centralized finance ( DEX decentralized exchange, decentralized P2P lending, etc.).

On Ethereum, everyone can run programmable electronic value and open access to the world.

In Venezuela, for example, due to severe inflation, the government's crazy money printing has caused local prices to rise nearly 460 times. Therefore, more and more people choose to replace legal currency with more stable digital assets, without intermediaries, peer-to-peer transactions and no need to hold foreign accounts. People start to use digital assets to conduct transactions. Asset preservation or investment. Venezuela’s Bitcoin transaction volume continues to hit a record high. JPMorgan Chase has repeatedly called Bitcoin a “fraud”, but even it has to admit that decentralized tokens are the last life-saving for the Venezuelan people in dire straits.  This shows that decentralized finance has enough rigid requirements to solve some of our pain points in financial life.

DeFi is so compatible and widely used in finance, so that it can develop a unique path in the blockchain ecology. The rapid development of technology also drives DeFi to continue to broaden its thinking and prosper.

2. CEX pushed the wave

Since the development of Bitcoin Market, CEX (Centralized Exchange) has not only accumulated a large user population, established a stable and mature matching system and wallet system, but also developed a large-scale user operation system.

Although the emergence of DEX (decentralized exchange) has diverted the active number and trading volume of CEX, and the position of CEX in digital asset trading and transfer has been shaken. On the contrary, CEX acted as the driving force that brought DeFi and its projects to the top of the wave while becoming the layout of DeFi.

Tokens were issued along with two star DeFi projects: Compound and Balancer. When this new model of projects first, then tokens, and then online trading appeared, it became the IDO that became the hot spot of DeFi, led by CEX and provided by the DeFi token project party, and the big carnival of exchange users' participation began.

3. User level

In addition to the large institutional players, there are some well-known capitals that have smelled the value and started to deploy in the early days of DeFi users, such as Coinbase, a16z, etc. Famous capitals can be seen in both MakerDAO and Compound, the head projects that become the hot spots of DeFi in 2020, or the rising stars Uniswap and Aave. Capital tells a story. At present, DeFi is an out-and-out wealth story, and this story attracts a large number of investors .

Since its inception, DeFi players have never been ordinary retail investors, but large investors and even institutions. Even for giants like Compound, they had no more than 1,500 users before launching the "borrowing is mining" strategy, but their lock-up amount reached 100 million US dollars.

After CEX deployed DeFi and formed the IDO system, affected by the profitability and operational announcements of its pioneers, retail investors also began to taste the sweetness of the DeFi project and its value. What needs to be vigilant is that in the field of digital assets, once a concept explodes, a bunch of imitators will follow. 

DeFi itself also has certain shortcomings. In a broad sense, DeFi refers to decentralized finance, and its operational complexity still poses a certain threshold and challenge for newcomers. For example, trading on decentralized exchanges often encounters congestion on the chain and sometimes takes a long time .

It does not solve the problem of more resources entering the digital dimension, so the next DeFi should focus on the recasting of the industrial ecology. Another issue of DeFi that is widely worried about is security. The biggest worry of all blockchain projects or all decentralized projects is hacker attacks. According to statistics, in 2020 attacks on DeFi, the amount of coins stolen or stolen has reached 36 million US dollars. It is really unreasonable. Therefore, if the coins pledged on the platform are attacked by hackers, how to ensure the security of the assets is also a problem that the DeFi project needs to solve urgently. Before the security of the smart contract itself is not guaranteed, we should look at DeFi more rationally instead of blindly pursuing it.

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Avatar for arslankhalid
2 years ago
Topics: Ethereum, Defi


Agreed, there is lot more work that needs to be done in the DeFi space. Security is one big aspect. But I believe its now moving towards mass adoption, which can only propel Defi into its next stage in 2022.

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