DeFi

How DeFi can overcome the odor of shitcoins and ponzinomics

DeFi Summer was an exhilarating time for many. It was a high-octane rollercoaster ride, characterized by insane gains and millionaires seemingly made overnight.

Unfortunately, that ride has now slowed down amidst Crypto Winter. Many projects that received tremendous hype without delivering on promises have been exposed as scams, Ponzi schemes and meaningless “shitcoins.”

With the global cryptocurrency market capitalization falling from all-time highs of US$3 trillion to less than a third of its former glory, many naysayers have also deemed crypto to just be a sham offering empty promises of generational wealth.

Over US$4.2 billion has also been lost from DeFi (decentralized finance) exploits, signifying that security and accountability are far from ready for large-scale adoption.

While there was a time when hype and meme-based platforms flourished, Crypto Winter has proven that a sustainable foundation cannot be built on the bedrock of hype and expectation.

DeFi, which was once hailed as “the future of finance” due to its ability to transcend geographical and wealth barriers through methods such as yield farming, has also been demoted to an “online casino.”

There is a silver lining to all of this — namely, that bear markets remove unviable projects, forcing users and builders in the space to focus on utility and practicality.

Without the fog of euphoria and the “get rich quick” mentality as distractions, we are able to look beneath the surface much more rationally for answers to important questions.

One such question often swept under the rug was “where does the yield come from?” In many unfortunate cases, the answer is, “If you still don’t know, you are the yield.”

Builders need to double down on practicality and utility to provide sustainable, non-ponzinomic yields to users to restore the damaged confidence in DeFi and allow its potential to shine through.

Real yield: Just a pipe dream, or more than a meme?

The waning financial markets and the increasing number of failed or closed platforms also fuel skepticism toward promised returns, giving rise to the hunt for “real yield.”

In the realm of intangible “magic internet money,” having external and organic sources of revenue for a platform that are not solely dependent on new investors (proper tokenomics instead of ponzinomics) and gives returns in blue chip assets or stablecoins is as real as it gets

In line with this growing trend, many platforms have started to promote themselves as providers of “real yield” in attempts to capture user interest, but how do we identify the wolves in sheep’s clothing?

It may require time and effort to research and understand, but looking beneath the surface to understand the protocol’s revenue generation mechanisms will almost certainly help.

While it is not the sexiest or most exciting to hear, most platforms with real yield will fall under the following strategies ingrained in traditional finance: (1) lending and borrowing through collateralization of assets, or (2) options and structured products.

The tradeoff for real yield is that the annualized percentage yields (APY) provided will be much lower than the “degen” yields characterizing DeFi Summer, which can run up to quadruple digits and more. 

Instead, users will have to mostly settle for single to double-digit returns on blue-chip assets such as Bitcoin, Ethereum or established stablecoins.

Mathematically, it may make sense to chase these high APYs, but Crypto Winter has shown these high yields are unsustainable. 

Many of such platforms provide rewards in the form of “farm tokens” or shitcoins that inevitably trend towards zero, or turn out to be outright scams or Ponzi schemes.

For yield farmers who insist on chasing these high APYs, they thus run the risk of losing their capital in its entirety.

DeFi isn’t just an online casino

While there are users who are comfortable with taking high amounts of risk for high rewards, this does not hold true for the majority who explore DeFi. 

DeFi’s promise is in decentralization and financial inclusion, not degeneracy after all. Its core value proposition is to remove reliance on intermediaries and provide self-custodial ownership of assets and wealth.

While most users view banks and other traditional intermediaries as safe and reliable, this is not an absolute even for countries with established financial systems. Past events like the 2007-2008 financial crisis and the collapse of Lehman Brothers, the fourth-largest investment bank in the United States, have proven this.

Even for the most secure bank accounts, users are always at risk of censorship to access, be it from bank runs, transfer limits or lengthy verification processes.

Unlike bank accounts, your self-custodial wallet used in DeFi also cannot be frozen and you maintain full ownership of your own assets at all times. Although this comes with its own set of risks, such as hacks and exploits, this can be mitigated through proper wallet hygiene, security audits, bug bounties, and other best practices.

With improvements in security and accessibility, there is tremendous potential in DeFi to be the next iteration of finance for users with self-governed assets and wealth.

‘Simplifi DeFi’ to achieve mainstream adoption

Another key value proposition of DeFi is simplification through the automation of smart contracts. While the underlying technology may be complex, this is a challenge for developers to tackle, not users.

On the front end, the user interface (UI) and user experience (UX) can be made so that users can perform a chain of transactions with the click of a button. They only need to know the relevant factors to consider for each action, such as the underlying risks and expected results.

This can be particularly useful for covered calls and other advancing trading strategies, which are familiar to financial experts and veteran traders but not to the average person.

With automated smart contracts, users only need to focus on how much is at risk to their capital, and what type of conditions to be wary of. 

As an example, strategies like a covered call that are complex to manually analyze and execute can be drastically simplified through automation. All users need to know is the expected gain and risks of each strategy, select how much to invest, decide when to withdraw, and how often to monitor their deposits.

Smart contracts also do not discriminate between users as long as the required parameters are met, meaning CEOs of Fortune 500 companies and minimum wage workers all have equal access to DeFi.

It has often been touted that DeFi needs to be so simple that “even your grandma can use it,” and Crypto Winter is the best time for builders to focus on making this a reality.

It is time to “Simplifi DeFi” for anyone to be able to access seamlessly and safely and focus on sustainable yield and practical innovation on battle-tested financial strategies. Only then can we restore faith in the potential of DeFi for financial inclusion and empowerment.

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