DeFi – decentralized finance
Less jaded and cynical crypto users saw this coming. Although it is tempting to frame this awesome growth as a bubble reminiscent of the ICO craze, with its many fraudulent and empty whitepaper projects, DeFi is its own thing. Bitcoin (BTC), Ethereum (ETH), and other cryptocurrencies laid the groundwork for transforming our perspective on the meaning of money. Underpinned by the internet and powered by blockchain, cryptocurrencies have value because they are not under the auspices of central bodies, left to be manipulated as central banks see fit.
Instead, cryptocurrencies derive the value of trust from more formidable sources: math, cryptography, blockchain, and peer-to-peer (P2P) technology. As such, unimpeded by national borders and calcified monetary mechanisms, Bitcoin is being adopted as a haven amid failed monetary systems.
From Argentina and Venezuela to Lebanon and Iran, it is becoming as much as digital gold as it is a form of payment. Popular small business accounting software Freshbooks even lists Bitcoin as a payment method that businesses should consider.
To add to the noise, one of the world’s largest banks, JPMorgan Chase, bailed out during the 2008–2009 financial crisis, projects that Bitcoin is headed toward replacing physical gold as a store of value. Bitcoin’s accessibility has largely increased as well, with investing platforms like eToro now offering cryptocurrency access to U.S. traders.
Separating the Wheat from the Chaff
A glance at DeFi’s growth curve in such a short span can easily mislead someone to think of it as a bubble. In some sense this is true, but not in the sense that matters in the long run. When we talk about a bubble – a rapid rise of market value driven by exuberant behavior – we have to view it in terms of maturation stages.
DeFi is still in the early maturation stage. We can see this by the overvalued and often memetic governance tokens. These tokens were developed and employed by blockchain developers to give people a tool to shape the protocol platform, vetting, and voting on new features via Ethereum’s smart contracts. Such ecosystems are also called decentralized autonomous organizations (DAOs).
Within the first months of the DeFi Yield Farming craze, the Compound platform with its COMP token rose 300% in value, only to halve in value a month later.
Only those DeFi platforms that offer value rise to the top. With the DeFi space, such value is far more tangible than the previous era of thousands of altcoins uselessly vying to dethrone Bitcoin while offering nothing extra in return.
On the other hand, DeFi platforms are explicit in the value they provide:
Virtual smart banking offering automated lending and borrowing.
Automated allocation of assets across low-risk investments.
Token exchanges across different blockchains.
Decentralized asset custody and insurance.
Since Ethereum was natively designed with smart contracts in mind, they all run on the Ethereum blockchain. There is one exception in the form of Lightning Network which runs on Bitcoin’s blockchain, but it only holds a $6.8 million market cap, and it only deals with payments. It is very difficult to create smart contracts on Bitcoin’s blockchain due to a lack of scripting logic.