Is DeFi Real or a Bubble Waiting to Burst?

  • Cryptocurrency Analysis

Decentralized Finance, otherwise known as DeFi, is proving to be more than a mere buzzword in the cryptocurrency space. The idea of taking out loans, borrowing funds, completing financial transactions, and participating in complex financial products without the need for a middleman or financial institution is quickly gaining traction.

In less than a month, the value of assets locked in the DeFi ecosystem has increased by nearly fourfold. Data from DeFi Pulse reveals that between June 1 and July, the segment witnessed an increase from $1 billion to $3.8 billion in the value of locked assets.

The Need for Change

More than ever, it is becoming apparent that the world of traditional finance is due to evolution. Despite the relatively high rate of penetration of the internet and smartphones, about 1.7 billion adults remain unbanked and without access to financial services.

Long before the effects of COVID-19 took hold, global banks were already struggling to reduce costs and improve efficiencies. Some central banks have made attempts at exploring blockchain-based solutions in their economies. It is glaring that the loopholes in traditional finance are beginning to widen and its current infrastructure of multiple inefficient intermediaries will be forced to make some serious changes. However, one is left to wonder if DeFi is truly the answer.

At the core of its solution, DeFi is attempting to remove all the layers of intermediaries involved in a typical financial transaction through the use of smart contracts. By removing the multiple layers of middlemen associated with legacy systems, benefits such as faster and cheaper transactions are transferred to the end-user.

Real or Not?

I was privileged to witness the rise and fall of many cryptocurrencies in late 2017 and throughout 2018. During the meteoric rise of Bitcoin in 2017 which led to the proliferation of cryptocurrencies, one recurring message from media houses and some renowned financial gurus was that Bitcoin was a bubble waiting to burst. You’d agree with me that while cryptocurrencies may not have gained widespread adoption since 2017, its underlying tech, blockchain, is finding multiple use cases across several industries.

Similar to 2017, it appears DeFi is the new kid in the block, and stats have shown that money is flowing in its direction. Yet, the question still remains whether the DeFi ecosystem is real or just hype.

Although new types of DeFi projects are hitting the market, DeFi lending, DeFi payments, and decentralized exchanges remain the most profitable industry segments. Within the lending niche which has been a focal point for the sector’s unprecedented growth are platforms like Compound and Maker who have attracted over $1.2 billion worth of assets.

In the decentralized exchange space, Level01, a P2P decentralized trading platform is combining blockchain and AI. Level01 is steadily establishing itself as a force to be reckoned with in the derivative exchange segment. Whilst exposing traders to a plethora of markets including oil, stocks, gold , and Forex, its native token, LVX is a viable decentralized asset to foster mainstream success.

By utilizing its trademarked AI-powered risk assessment algorithm, Level01 is providing traders with real-time assessment of a reasonable price to purchase tradable assets; thus, leveling the playing field. When combined with the platform’s optimized smart contract settlement feature which seamlessly integrates the use of LVX, Level01 and its tokenized infrastructural solution seems to be quite robust.

There are obviously several other players in the DeFi space. However, the relative ease with which anyone can create and market DeFi products definitely has some markings of a bubble. In this regard, some DeFi services have already started promising extravagantly high returns on lending products. Reminiscing on the boom of digital currencies in 2017 and 2018, it is safe to say that there will be actors in the DeFi space who have ulterior motives. These are the projects consumers should be careful of.

Co-creator of Ethereum , Vitalik Buterin expressed his concerns about these exorbitant ROIs from DeFi products. He said in a tweet, “Interest rates significantly higher than what you can get in traditional finance are inherently either temporary arbitrage opportunities or come with unstated risks attached.”

A Big Potential

Bitcoin and a handful of other cryptocurrencies have to an extent proven the naysayers wrong. Three years down the line, cryptocurrencies are still standing strong and slowly gaining ground. Instead of tagging the entire DeFi space “a bubble waiting to pop”, I believe the traditional finance market is ready for some real change and DeFi holds the key.

According to Ethan Buchman, CEO of Informal Systems and vice president of The Interchain Foundation,
“Defi is interesting as a use case for rapidly experimenting with new financial products with considerably less friction. It’s a huge step forward for democratizing access to financial products and the design of new ones.”

Projects like Kava are already changing the narrative and it is expected that more DeFi-targeted innovations hit the space in the next few months. Kava, for example, is a multi-asset DeFi platform that offers loans and other financial services to cryptocurrency users. Kava was launched to challenge market leaders like Compound and Maker and the DeFi platform already has over 20 million in its network from BNB holders.

In summary, although traditional markets may feel threatened, it is impossible to ignore the improvements and potential cost-savings that DeFi solutions are trying to bring. All of these benefits make Decentralized Finance real and an inevitable next step.

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