DeFi has burst on to the cryptocurrency scene in a major way in 2020 with its potential and promise being recognised by traditional financial types and crypto lovers alike. However, the burgeoning space still has a lot of issues to work through to really break out, but will it be able to bolster its fundamentals?
The main issue with DeFi is not the concerns around its safety and security — with a number of breaches already reported — it is much deeper than that. There appears to be a heightened sense of interest around its potential to make money off this new space.
Just like the ICO phenomenon burst onto the scene and took many investors by storm, there were problems with the search for a get rich quick scheme permeating the promise of a disruptive VC technology through crypto.
In DeFi circles, the new wave of yield farming looks to be the latest cash grab that is inflating DeFiperhaps beyond its means, and more importantly, above its fundamentals. DeFi certainly holds a lot of potential, but the amount the space has grown in this year alone is concerning and has the feeling of being a potential bubble.
Yield farming not only is only aimed at pushing more money into the pockets of these speculators, it is also bolstering metrics to make projects look a lot more impressive than they might be on their core offerings alone.
The rise of yield farming is throwing the metrics off balance. Protocols reward their users with their own governance tokens, essentially as a payment for using the platform. A frenzied movement to maximize the yield for these tokens distorted the prevailing DeFi success metric, the Total Value Locked.
WIll this keep going?
This growth from yield farming will have its advantages, but its sustainability will be the core question. While the liquidity mining hype and subsequent price gains have likely contributed to attracting additional attention, fundamental metrics became highly distorted due to the speculation.
Decentralized exchanges appear to have benefited the most from the hype, both in terms of new users and volumes, but that appears to be an acceleration of an already positive trend. Whether the growth will stick remains an important question. Kain Warwick, a co-founder of Synthetix — a crypto-backed asset issuer — told Cointelegraph:
“It’s always possible that people will farm the yield and then find a fresh field, so bootstrapping liquidity is not a guarantee that your protocol will retain users. But bootstrapping liquidity with some sort of incentive is a great way to attract newcomers because if you have anything resembling product-market fit, then there is likely to be some stickiness.”
Cronje was somewhat more negative, using a farming analogy to describe what could happen, saying: “All the yield chasers just running in to farm yield and then leaving,” which is a negative thing according to him, acting like a swarm of locusts, adding: “But after they have ruined the crops, sometimes, a stronger crop can grow, and some locusts remain, and they end up being symbiotic instead of the initial parasitic.”
