In a recent tweet by Changpeng Zhao, the CEO of one of the world's largest cryptocurrency exchanges, Binance, stated: "Many of the DeFi projects will fail. Some may offer short term gains, but they come with super high risks too. Don't invest money you can't lose." He later goes on to clarify that this principle applies to every project, DeFi or not. Ordinarily, I casually went through my twitter feed and wasn't looking to engage any tweets. However, the phraseꟷ ”Don’t invest money you can't lose" struck me and drew my attention.
For many cryptocurrency enthusiasts and investors, 2020 has been a roller coaster ride; one constant topic drawing much attention is decentralized finance projects (DeFi). Many cryptocurrency experts are going back and forth on whether DeFi is truly the next big thing or go into oblivion like STOs and other crypto hypes of the past.
Let’s look at a few downsides of the DeFi bubble and why many DeFi projects will not make headway in the current business climate.
When bitcoin started in 2008, many experts were not gentle with their criticism of the distributed ledger model. However, one thing that can not be denied is Satoshi's bitcoin whitepaper and its clarity; every detail was concisely spelled out, and the model was fully understood by anyone paying attention.
Unfortunately, while many DeFi projects in the blockchain space offer a range of services like loans, savings, and money exchange, their operations are largely ambiguous with no defined boundaries. Besides claiming that they are backed up by smart contracts, transparency, and many technical terms, many DeFi projects have jumped on the hype to scam unsuspecting investors. Many DeFi investors are equally either too lazy to do their homework or are after short term gains.
DISREGARD FOR REGULATION
Over the years, we have borne witness to the rise of cryptocurrencies and mainstream adoption by the most prominent organizations and institutions in the world. However, this was not an overnight process; the introduction of Know Your Customer (KYC verification), the Anti-money laundering Act(AML), and many other state laws have built public trust cryptocurrencies.
However, DeFi projects promise a financially open space where you don't need to be identified or verified. Uniswap's free listing policy allows any token, scam, or scam to be added and traded overnight. It leaves the users to perform their research, which is, in most cases, inadequate. This lack of regulation has created a wave of money laundry and crypto exit scams in many DeFi projects.
Recently we have seen many DeFi projects crumble, including the $14m Sushiswap exit scam on September 5. In all truth, complete lack of regulation or governance is a mirage, and DeFi tasks must recognize this or failure becomes inevitable. Indeed, we'll see how many DeFi projects will thrive in the next couple of months and not just written off as criminal enterprises.