Lessons Lost: DeFi Compared to the 2017 ICO Bubble – The Tokenist


Decentralized Finance (DeFi) is unquestionably the hot topic in cryptocurrency at the moment, and it’s no surprise why. These platforms and protocols allow users to earn interest on their capital with minimal effort, lowering the barrier of entry into profit-making. With an all-time high of 457,000 unique users, it shows no sign of stopping. But is it a bubble about to burst?

DeFi Now the Go-to Space for Quick Profits

The boom has also come at a cost however, as the lowered barrier of entry and easy creation of protocols through forks has resulted in several less than stellar incidents. The DeFi space is taking on the same attitude as the ICO boom of 2017, which saw multiple projects of poor quality — some outright scams — resulting in heavy losses for investors.

Total users in the DeFi space.

While not as tenuous as the ICO era was at its peak, the DeFi space is showing all the signs of retraction. This could result from the release of unaudited smart contracts to founders cashing out large sums of token holdings. It’s clear that greed for quick profits is misleading investor judgment in DeFi.

Major incidents usually occur in isolation — one unsecure protocol losing users’ funds, for example — but it will damage the overall market to some degree. In August, Encode Club founder, Damir Bandalo, stated that the market was overvalued by roughly $3 billion.

The DeFi market currently has $8 billion locked in. For comparison, ICOs in 2017 raised roughly $5 billion.

Even founders of DeFi projects themselves, besides other insiders in the crypto space, have begun to criticize the deluge of unaudited protocols and questionable policies. It doesn’t take much to see that the DeFi boom is mirroring the ICO boom with some accuracy. This does not bode well for the market and its long-term growth.

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A Surge in Tokens of Questionable Quality

One only needs to look to the several irreverent protocols named after food to see that the DeFi space is far from being mature. By itself, it may not mean much, but there is a definite trend in these meme protocols, which investors are pumping and dumping for a quick buck. These incidents also favor those who already possess large capital — something pointed out by insiders.

Food-themed or not, it is the quality of the code and features that matter. Sadly, a lot of these newer protocols are unaudited in some cases, while others have suspect token allocation practices. Officials found a critical bug in the YAM protocol days after launch, which led to over $500,00 being lost forever.

The quick-release nature of the DeFi space, and the lack of scrutiny on the part of investors, shows the similarity to the 2017 ICO period. However, back then, disingenuous individuals preyed on the ignorance of the wide swathe of new investors entering the market. This malicious behavior is not quite as apparent in DeFi, though there is room for unsavory individuals to fleece investors.

Short-term Greed is Exacerbating the Problem

Some investors secured a profit by entering the space early enough, but everyone else has had to fight for scraps. Going beyond dividend stocks for passive income, investors have been flooding the DeFi market from around June 2020.

This was when Compound Finance launched the COMP token. The number of new DeFi assets at this time already showed signs of a bubble, with over 900 new assets.

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This surge has been accompanied by a wave of governance and yield farming tokens that sometimes offered absurd returns rates. In extreme cases, like that of YFI, tokens can experience a jump of 35,000% in value in a week. The accusation levied against the DeFi market is that many investors are making money out of thin air.

By hoping that others will buy into whatever is the token in question, many investors are essentially trying to capitalize on the novelty of a new DeFi protocol. This greed is what is pushing some DeFi tokens and protocols to absurd valuations, which can only sustain itself for so long.

Final Thoughts

There are marked similarities in what is occurring in DeFi right now and the ICO period of 2017. Sooner or later, the unsustainable profit-making policies of yield farming programs will break. Following this, it is likely that regulators will turn their attention to practices that might hurt consumers.

For the long term development and stability of the DeFi space, which is undoubtedly valuable, this greed and jumping on the bandwagon is ultimately detrimental. With regulators slowly turning their attention to more cryptocurrency regulation, it would only be better for the DeFi market to take a step back and rationalize its reason for existence.

What do you think of the sudden surge in DeFi? Is it a bubble that’s bound to burst? Let us know in the comments below.

About the author

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.

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