The great downfall is always caused by great expectations
What may be considered an overhyped decentralized finance (DeFi) sector, currently leads innovation in cryptocurrency. What’s clear is that there’s a huge gap between trust in the old-school system and the profit-hungry and enthusiasm-fueled degen nation of the alternative finance underworld that generates magic internet money by leveraging the latest blockchain technologies.
However, in a world where the power balance shifts every few days, the DeFi realm has now returned to its traditional roots in a psychedelic vein — with profits rising like magic mushrooms. Nonetheless, a single bad trip can send everyone on the path of despair. Greed, frustration, and convicted felons all have their place in the wonderland of decentralized finance. Going down the rabbit hole leads to fascinating revelations about the rising idols of the alternative finance system. Just like after the good old ICO days, trust and reputation have never been more vital than they are now.
Leapfrogging into Madness
There is a sinister feel about DeFi from the bystander’s perspective. The decentralized protocols have made many people rich and created a specific realm within the crypto world, with its own language, memes, and of course “gods”.
Take, for example, Daniele Sesta, the self-proclaimed leader of the popular Frog Nation community, who fast became “famous” in the DeFi community for a mixture of populist Twitter content and tokens that made many people rich.
Liquidations, FUD, allegations, and a plunging market: January 2022 was beyond different from what we have come to expect — making it a wild ride for a range of stablecoins in DeFi. The emerging field skyrocketed from $0.9 billion in January 2020 to $240bn in November 2021. What’s clear is that a highly-promising future is impossible without a few stumbling blocks here and there.
However, any idol relies on their lesser-known crew, who often do the lion’s share of the work. When the illusions in Sesta’s Wonderland dissipated, we saw that the $TIME token was managed badly.
The rotten core of the shiny project was that Michael Patrin, formerly Omar Dhanani, was the co-founder of QuadrigaCX, and is notorious for his fraudulent activities and connections to the mysterious disappearance of its founder, Gerald Cotten. In addition to being involved with Quadriga, Patrin also pleaded guilty to credit card fraud, burglary, grand larceny, and computer fraud. Sifu has already become fabulously rich with the help of Wonderland, and also thanks to his previous crimes, why would he need to continue.
A vote was called, which proves the point that Frog Nation does not share Daniele’s principles. Could anyone be trying to damage the reputation of Cronje’s new venture with this collaboration? Personal experiences aside, this incident had wide-ranging implications for all DeFi markets. Since Cronje and the launch of YFI, there has been a malicious (albeit unwanted) trend towards idolatry in DeFi, and Sesta is the latest example.
Waking Up from the American Dream?
DeFi users have created a situation where people are revered as gods. When anonymous members of the DAO can do whatever they want with protocol money worth millions of dollars, when multimillion-dollar setups and hacker attacks sweep through and are immediately forgotten, it is a far cry from what was originally created.
Dirty secrets like this are exactly why DeFi is often slammed by regulators, as are traditional finance and the public at large. Even if most aren’t happy with the current system, how can we convince new users to drop the safety net when dealing with scandals like this?
Hacks and exploits are inevitable followers of any emerging ecosystem. Traditional finance regulators can easily use this to win their case against DeFi. Despite the damage done to the reputation of the industry, DeFi is here to stay. But events like this will surely impact the look at transparency in the future.
The cost of capital to crypto is much higher than in traditional finance. STASIS as a major market maker has determined that the average rate of return in DeFi is 30% per annum, compared to the traditional world where it’s only 4%. Under such conditions, the shift to alternative finance is inevitable.
However, spawning DeFi protocols and their forks just creates a copy of a copy of a copy… where algorithmic stablecoins arise. However, in order for these coins to become really stable, they need someone to participate in this inflation. Someone needs to buy that. So the wheel of progress launches Ponzinomics — when interest is paid from the new incoming wave of users.
The yield requirements for crypto assets are high and there is still a low percentage of institutional capital onboarding. The experiments will continue, and there is still no working model that would take into account the risks and in the medium term would guarantee the owner the preservation of value.
There were more than 240 projects in the stablecoin segment, but how many were able to cope with the consistency of accounts? Due to various statistics, 90% of projects in the crypto market have been considered scams.
There are always risks, and if you do not have a long-term stakeholder, then there may be different development scenarios. That is why the cost of capital is so expensive.
Leapfrogging ahead of the curve
Two things never change, and it doesn’t matter if it’s the 1st or 21st century — there is always a scammer promising magic money, and hordes of naive people who never learn, choose to invest, and then cry after losing their life savings.
However, if you invest in a project that doesn’t really have a product, you’ll always be faced with this risk. Some other protocols in DeFi 2.0 have product/market fit. DYOR and a careful attitude toward new developments is the key to success in the new market realities.
The third decade of the XXI century marks an apparent shift from Web2 to Web 3, and distributed ledger technologies are the right tools to build a reliable bridge across these two generations.
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