By Konstantin Richter, CEO and Founder of Blockdaemon
The crypto industry is no stranger to hype and hyperbole. From the heady ICO boom of 2017, to much vaunted protocols which claim to have finally solved the dilemmas of decentralization, scalability and network governance; noise in the industry often tends to focus on novelty rather than steady delineated progress.
Decentralized finance (DeFi) is the latest corner of the crypto universe to grab headlines. The rise in interest in DeFi has been significant, with a staggering 1,300% increase in value locked into decentralized finance applications in 2020, to over $9 billion.
The potential for such applications to grow is significant, with a recent Messari research report estimating that only 0.3% of Bitcoin’s $216 billion market cap has been tokenized on Ethereum for use in DeFi protocols, indicating that there is plenty of opportunity for projects to capture greater value.
This new rush of interest and investment in DeFi has prompted conflicting reactions from industry experts, with some pointing to a new exciting phase in the cryptocurrency industry, and others warning of a bubble similar to the 2017 ICO craze.
Certainly, there are parallels to be drawn between the 2017 ICO days and the current wave of DeFi speculation. Much like the ICO peak of 2017, the volumes being pumped into DeFi projects is in the billions.
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, the parallels between the two phenomena diverge in a number of distinct ways. 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.
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.
It is clear that DeFi is here to stay. Its continued growth and path to retail adoption will no doubt be followed zealously by the industry in the months and years to come.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.