Is it a bubble? Is it a revolutionary solution to age-old problems? Is it a bunch of Ponzi schemes teaming up to scam the good folk of the crypto industry? We’re here to (hopefully) answer those questions and maybe delve into why crypto treats DeFi with scrutiny equivalent to that of the ICO craze. We’ll also try to explain why ICOs and DeFi are correlated, and why ultimately, the comparisons aren’t fair to the complex nature of decentralized finance.
Firstly, DeFi is a nuanced and multifaceted term. Customarily described as a group of projects whose aim is to fix the problems that traditional finance (and crypto) could not, it covers a wide range of projects and ideas. Many of these projects have, in fact, fundamentally challenged traditional approaches to cryptocurrency.
The comparison between DeFi and ICOs is somewhat understandable. Since they are both ethereum-based, it’s easy to draw comparisons. For instance, both incentivize the locking of ETH or ETH tokens like ERC-20 and ERC-721. Both started as a VC and angel investor-based movement that slowly permeated into retail investor trading spaces. ICOs also arguably shared the same dreams as DeFi: decentralizing existing business models.
But before writing off DeFi entirely, some key differences should be noted.
DeFi vs. ICOs And Skepticism Surrounding Ethereum
ICOs were really only ever seen as one thing: an investment opportunity. A decentralized fundraising campaign, with the emphasis never really being on the “project” behind the token. Indeed, some of the hype was warranted. But at the end of the day, most of them never sold a real, usable product.
This was in part due to the lack of transparency and accountability in the ICO space at the time (which is why regulators eventually came down hard). Part of the problem was that any investor could participate in an ICO by sending their crypto to a project, even if there was no proof of it being a viable project. Sometimes they’d have a website, sometimes even a whitepaper, but that was about it. Unsurprisingly, many ICOs turned out to be fraudulent. Scams happened so often that ICOs became synonymous with just about everything wrong with cryptocurrency. Any real, quantifiable hype was regularly centered around the offering itself, and its victims were usually retail investors who bought into that hype. Some made it big, most lost big.
“To make it no rules at all, when companies can just willy-nilly take people’s money and offer no information at all, with no governance, that sounds to me like you’re taking advantage of people,”
Adena Friedman said at the Future of Fintech conference in New York Wednesday.
While we’re on the topic of governance, let’s talk about DeFi. Decentralized finance projects have (almost) everything that ICOs lacked: transparency, accountability, efficiency, heck, even better intentions. These attributes are vital to those operating in the DeFi space — maybe due to people being burned so badly during the ICO craze. With governance tokens, liquidity pools, and open-source protocols that anyone can use, it’s clear that the motive is quite different. In fact, it’s a crucial difference that we shouldn’t overlook.
Those who invest in DeFi projects are hoping to gain not just from token appreciation, but the project itself. Lending protocols, liquidity pools and yield farming, interest-earning, and staking are just a few examples of this.
Decentralized finance projects center around the improvement of traditional crypto services. Improved consensus protocols like Proof-of-Stake (PoS) are a staple, and often open-source, with tokens offered freely for staking on the platform instead of relying on hype to push price, DeFi projects offer real useable products.
It’s not all about crowdfunding hype riddled with random twitter bots — the project is the hype. The ability to earn with tokens to assist in the project is the hype. The ability to help govern the platform as a user is the hype.
Part of the reason people are so weary and critical of DeFi is that there has been a lot of pressure on ethereum lately to deliver on their promises. Terms like “ethereum killers” and questions of scalability have even their early users defecting to build new platforms as a response to these issues. While DeFi is in a lot of ways a response to the lacking of the ethereum platform, some of that pressure can surely permeate into projects built on it. (Don’t get us started on Crypto Kitties)
Why Nobody Knows What Will Happen
Regardless of whether you’re glass-half-full or half-empty on DeFi, it’s hard not to compare the two. Both are closely tied to ethereum, as well as to improving ethereum. But this type of thinking is fallacious. To assume that they are the same and will meet the same end because of their similarities just isn’t enough proof. Not to mention, there are a decent amount of differences that are being left out of this conversation that should not be ignored.
All in all, it’s impossible to say with complete certainty where DeFi will go. Since DeFi has far surpassed where the ICO craze took us in 2017, and since the media incessantly compares them, it’s only natural that people be on the lookout for the top. Some think we’re at it, while others think that DeFi is a bubble. Some will always think that it’ll shoot for the stars and go on a bull run until the end of time. The truth probably lies somewhere in the middle.
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