2020 will go down as the year of DeFi in the cryptocurrency space but it’s hard to ignore the sense of déjà vu harkening back to the initial coin offering craze of 2017.
The start of a new decade has been a particularly challenging one for the world at large. As countries around the globe grapple with the ongoing Coronavirus pandemic, economies have stammered and people’s lives have been changed dramatically.
In surprisingly stark contrast, a burgeoning craze has overtaken the world of cryptocurrencies and blockchain while traditional economies and financial institutions endure increasingly tough times.
Decentralized Finance is the hottest trend in the cryptocurrency space and has attracted billions of dollars in investments as users look to maximise returns from various projects. Before we delve into the similarities between the current craze and the emergence of initial coin offerings (ICO) in 2017, it’s worth highlighting what these new projects are all about.
Yield farming driving DeFi
Decentralized Finance, now known colloquially as DeFi, is the collection of a number of new blockchain-based platforms that provide a variety of services in direct competition with traditional finance institutions.
Many of these platforms allow users to essentially take out loans or deposit savings through the respective decentralized platform being used. It’s finance at its core, but the caveat is that blockchain technology is doing all the work, removing the need for a centralized institution.
Various projects have gained tremendous support in a short amount of time, with yield farming being a particular driver of interest in these different DeFi platforms. Yield Farming is the general term used to describe projects that allow users to deposit cryptocurrency in the platform, and earn interest on that deposit.
That interest is typically paid out in the form of the native currency of that given platform and it’s been a lucrative endeavor for a lot of savvy investors that got in early.
DeFi projects are essentially Decentralized Applications that are specifically focused on providing a financial service of some sort. They’re intrinsically tied into smart contract functionality, which is part of the reason why Ethereum has enjoyed a prosperous 2020.
The Daily Chain has compiled a digital compendium on DeFi with everything you need to know about the latest innovation in the space. The main benefits for the layman are pretty simple. DeFi offers better return on investment, complete control of your digital assets and immutability of the given blockchain platform being used.
Why does this feel like Déjà vu?
Without going into a deep dive of the various different DeFi projects, a basic understanding of what these platforms offer allows one to take a step back and gain some valuable perspective.
Many users are staking cryptocurrency holdings to earn better interest on their assets than they would investing in traditional financial assets, stocks and other financial offerings. Many of these projects are chugging along fruitfully, operating as intended.
But projects like the YAM DeFi platform started up, crashed and burned before many people even figured out what a digital YAM was. A critical bug in the codebase saw the YAM token plunge from $160 a token to below $1 in 24 hours. The project had over $500mln in capital locked into the protocol.
The show will go on as the developers of the protocol look to relaunch the platform and allow users to re-mint their lost holdings in a proverbial YAM 2.0 project.
Here’s where the Déjà vu kicked in. Rewind the clock three years and Bitcoin and Ethereum were at the bottom of a steep staircase that would see both cryptocurrencies reach lofty all-time highs, in the mother of all cryptocurrency bubbles.
The latter had only been in existence for a couple of years and had blazed the proverbial trail for initial coin offerings. Furthermore the smart contract platform essentially allowed other developers and companies to build their very own blockchain and cryptocurrency projects.
What ensued was the boom of ICOs. Every person with a half baked business idea that could be ‘put on a blockchain’ released whitepapers on shiny websites and began raising millions of dollars in investments.
Many didn’t see the light of day. Investopedia tells us that half of all the ICOs launched in 2017 haven’t raised a single cent since then. Nevertheless a study from research and consulting firm GreySpark Partners in 2018 claims that 743 projects raised over $1mln each.
While many may have failed, some projects have gone on to become industry leaders in the blockchain space.
The rise of DeFi platforms feels eerily similar to the ICO boom three years ago. One can only hope that people have learned from the mistakes of the past and do their due diligence before getting involved with any project.