DeFi or decentralized finance has been doing extremely well this year. After Compound Protocol (COMP) opened the pandora box for everybody to see, everybody started seeing DeFi protocols (with their own governance tokens) as the next gold rush. They started to think that they can make the same ones like ICO’s 2017 and make a quick 5x-10x profit.
After the boom of YFI (yearn.finance), everything else started to take place. There are a lot of YF clones such as YFII, YFV, YFL, and YFFI. All of these yield farming tokens become huge and successfully make big profits. And then, there are also AMM (automated market maker) yield farming tokens that have been going viral like SUSHI.
All of these tokens have been going up like crazy, and even Ethereum gas fees have been going up without any consolidation. Ethereum gas fees were at 550 GWEI at one point due to everybody yield farming these DeFi tokens, with over $5 transaction fee for a simple token transaction. Uniswap transactions were as high as $50 each. So, with all these craziness regarding DeFi, will it suffer the same fate like 2017’s ICO boom and bust?
The Fundamental Differences Between The Two
Although the differences between the two (ICO and DeFi) are kinda obvious, many people always try to link them and group them all together. This is very normal considering the current DeFi bubble reminds crypto traders of the craziness and hype of ICOs back in late 2017 and early 2018.
Many crypto traders made a lot of money from their ICO investments back in 2017, and many traders now have been making similar gains from these DeFi tokens like YFI or SUSHI. This is why everybody says it’s a bubble and it’s about to pop soon.
However, it’s important to acknowledge that there are fundamental differences between ICOs and DeFis. Back in 2017, you only need a fancy website and good-looking whitepaper. That would be enough as long as your ICO was launched at the right time.
Nowadays, however, you need to actually have a working yield farming mechanism within your DeFi. Yes, you can just clone YFI or Sushiswap, but you still need to have a working product if you want to go viral like them.
The good thing about DeFi is that it actually fulfills the actual purpose of cryptocurrencies. By mimicking the processes of traditional finance (lending, trading, borrowing, etc.) but all through the automaton of smart contracts without middle-men. That’s pretty smart.
It’s easy to predict that the staking feature and incentivization of lending/borrowing in DeFi protocol would stay for a very long time in the blockchain industry. However, the yield farming concept with huge APR definitely would pop sooner or later because their growth is definitely not sustainable.
The Question Is Not If But When
The problem with DeFi, as mentioned earlier, is that their governance token prices have been growing like crazy. The concept and fundamentals of DeFi protocols are definitely much stronger than ICOs. However, the growth of YFI, SUSHI, and others have created a giant bubble that is about to pop. It’s not even a question of if anymore but when.
The thing is that we are still in Q3-Q4 2020, not too long after Bitcoin halving this year. If history has taught us anything, the crypto bull market will not last for just a few months. Just like from mid-2016 until late 2017, the crypto market had a steady growth over time with occasional bad months. It’s still logical to say that we would have a similar time period for the current bull market. That being said, nobody has a crystal ball.
At the end of the day, it’s always wise to put money only where you can afford to lose. With the giant bubble that the DeFi space has created, yield farmers will be exposed at even greater risk than ever before. Interestingly, we are in the middle of a global financial crisis. The timing of this DeFi bubble boom might be “extended” if the world’s economy cannot really recover from this pandemic (especially this year)