DeFi – Hype vs. Value
Decentralized finance (DeFi) is the latest contender in the crypto universe that has been in the headlines frequently. The rise in interest of DeFi has been significant, with an astounding 1,300% increase in value locked into decentralized finance applications in 2020, to over $9 billion. DeFi has been a hot topic over the course of the last year: exchanges, loan platforms, and other projects that act as autonomous hubs that users can use to access a variety of financial services without having to rely on a third party.
But is it just a hype – just like many others? Weiss Crypto Ratings didn’t go too far to describe the DeFi hype as a “bubble”, but did say in a tweet that “eventually, the mania will end, and DeFi will trade in line with the rest of the market.” On The other spectrum, some experts believe that the end is far from over and the earnings are just a fraction of what their potential growth could be.
Similarly, a number of stories from the DeFi sector offer hallmarks of classic exit scams during the ICO boom, where founders quickly cashed out and investors were left holding worthless altcoins.
However, there are some pretty distinct differences in these two cases as well. For one, the category of investors currently speculating on DeFi projects are not the same retail investors that often invested in ICOs. Speculating in DeFi is largely inaccessible to retail investors at the current time, with a high degree of technical expertise required for success, as well as negotiating challenging user interfaces.
Industry experts tend to believe that the current growth in DeFi is fueled by sophisticated investors with superior technical know how. This may indicate that a peak of DeFi speculation driven by retail investors has yet to be reached.
Make no mistake though, it is pure speculation driving the current boom in DeFi. It remains to be seen what the core user market for the borrowing and lending services of such applications will look like once the hype cycle diminishes and the ability to profit off wild swings in token price halts.
That is not to say that all this speculation in DeFi is inherently bad. Greater investment in the sector builds the profile of a really interesting and potentially game-changing application of blockchain technology in our financial system. It also brings greater institutional investment into the sector through VCs, hedge funds and other institutions which will in turn increase accessibility and enable greater retail access to services.
According to Konstantin Richter, CEO and Founder of Blockdaemon, in many ways, the DeFi boom is an indication of the maturity of the crypto industry. The quality of projects which have come to market, and the demands that investors are making of these projects before investing, far outstrip the thinly guised project scams which flooded the market in 2017.
Although there are still kinks to be ironed out, DeFi is a tangible and ready for market use-case which has genuine potential to revolutionize our financial system. The pace of innovation in the sector has been incredibly rapid and the market has significantly developed in the short time it has been around.
It will be interesting also to see also how the DeFi sector addresses the challenges that face the wider blockchain industry. The concept of decentralization and active participation in network governance are issues that blockchain networks have struggled to implement to full effect, and it will be interesting to see whether DeFi applications can find new methods of solving the same issues.