The decentralized finance (DeFi) sector has come under severe pressure in recent months. According to DeFi Llama, the total value of locked tokens (Total Value Locked), meaning all coins invested on DeFi platforms, has plummeted from more than $250 billion to just over $76 billion. Many investors and crypto enthusiasts are currently wondering whether DeFi has a future at all.
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Problems of decentralized crypto platforms
DeFi, or Decentralized Finance, is a sub-sector of the crypto industry that offers financial services such as savings accounts, loans, or indexes. But instead of banks and other traditional financial institutions, open-source smart contract protocols are used here.
For many, DeFi means shifting power from institutions to ordinary people who are part of governance. For them, the goal is to disrupt the largest parts of the financial industry. DeFi protocols like Maker and Compound, for example, allow people to borrow in a completely decentralized way.
Similarly, platforms like Uniswap, Curve Finance, and PancakeSwap facilitate the buying and selling of cryptocurrencies in a completely public process. There are other decentralized finance platforms that allow money to be invested and liquidity to be provided, which is often referred to as staking.
Usually, DeFi platforms have their own governance tokens that can be bought on crypto exchanges. With the help of these tokens, one can secure perks, but also participate in important decisions. For example, you can vote on whether the respective platform should switch from a blockchain like Ethereum to Cardano.
For years, however, there have been concerns about DeFi. For one, the whole decentralized finance industry has no real regulations, which makes it vulnerable to fraud and manipulation. Also, many experts believe that DeFi is very complicated for ordinary people. Moreover, many platforms take advantage of users’ ignorance and advertise claims that are clearly too good to be true. Such as a guaranteed return of 20% or more.
At the height of the popularity of Bitcoin and other coins, over $250 billion was invested in cryptocurrencies on DeFi platforms. A few months later, the total value is just over $76 billion. This crash not only affects the industry in general but every single blockchain that enables smart contracts and thus DeFi in the first place. This includes Ethereum, BNB, Tron, Avalanche, and many others. Consequently, the price of many governance tokens has crashed as well, such as AAVE, MKR, ANC, and UNI:
DeFi is not dead
However, it is too early to declare DeFi dead. Rather, the industry is following the path that all innovations go through until they reach maturity.
For example, remember that the same cycle occurred in the early 2000s, when the Internet and mobile were developing rapidly. Many new technology companies promised great returns and any number of small investors put their money into them. But the whole thing ended with the bursting of the dotcom bubble, which cost investors billions.
In a way, the situation repeated itself recently in the electric vehicle industry. After Tesla’s success, the number of electric car manufacturers skyrocketed. Many of them are now in trouble or have already ceased operations.
Therefore, I believe that DeFi is not dead. But many protocols like Wonderland or Abracadabra will most likely not survive the current problems in the market. Only those DeFi platforms will stay afloat that have secured themselves well – among other things against hacker attacks, as recent history shows.
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