In the space of 12 months, DeFi has grown into a $ 15 billion industry, with governance tokens now worth even more than Bitcoin.
But the rapid explosion of protocols has created significant growing pains… and worries that the industry is not sustainable. When interest rates on conventional savings accounts reach a fraction of a percent, while yield farming is generating triple-digit returns, it is inevitable that questions will arise whether this is a bubble that could burst.
As Ethereum co-founder Vitalik Buterin recently pointed out in a podcast with Ryan Sean Adams, such skyrocketing interest rates are “ just a temporary promotion made by printing some composite tokens, and you just can’t keep printing tokens forver. ” “
SEBA, a regulated crypto bank in Switzerland, hit the nail on the head in September when it released a report that asks, “What happens when the music stops?”
The analysts warned that the current trend in DeFi’s crop is unsustainable – and further predicted that only a small handful of protocols would survive in the long run. Yearn.finance has indeed already started an abundance of mergers designed in recent weeks to strengthen development resources and expand the liquidity pool.
While SEBA has gone to great lengths to emphasize that not all crop cultivation is lacking in earnings, the company added, “Yield farmers made money by jumping from one protocol to another. As long as there are buyers for new protocol tokens, harvest farmers can continue to jump between protocols. When buyers no longer accept the other side of the trade, this disturbed activity is stopped. This trend is clearly unsustainable. “
It referred to SushiSwap, a fork from Uniswap, as an example. After launch, numerous other food-themed forks emerged. “When markets took a bad turn, all markets except SUSHI corrected by more than 99% and became nearly worthless,” SEBA analysts wrote.
The bank eventually drew parallels to the dizzying ICO boom in 2017 and 2018 – where most ambitious projects will not stand the test of time.
Unfortunately, headaches in the DeFi room don’t stop here. This year, Ethereum has gained dominance as the main blockchain on which protocols are based – and according to DappRadar, this network had 96% of the total transaction volume in the DeFi ecosystem in the third quarter of 2020.
As reported by Cointelegraph in September, this sparked alarm bells about Ethereum’s scalability issues – with transaction fees rising to a record high. While it is hoped that Eth2 will dramatically increase the network’s capacity, experts warn that it could take years to complete the transition to proof-of-stake … and by then the industry may have had little choice but to look to move to alternative blockchains.
The research company BraveNewCoin addressed these challenges in a recent report, where it identified 18 serious non-financial risks facing the DeFi industry.
“Scalability risk is also the risk that Ethereum itself will not scale up properly so that DeFi protocols can function sustainably over time. If network activity is too high (as it was recently), it deters smaller investors and removes the ‘accessible’ aspect of DeFi – as smaller investors earn rewards that are lower than the cost of obtaining them. Scalability risks not only affect investors, but also protocols, ”wrote BNC.
And all this is before we mention the myriad smart contract vulnerabilities that have led to millions of dollars in capital being sucked out of the DeFi ecosystem by malicious actors. Significant incidents seem to occur almost weekly, eroding investor confidence and jeopardizing the long-term potential of the industry.
Finding the answers
According to Unifi – which has already launched on five different blockchains – change is needed if the industry has any prospect of a meaningful presence in the crypto industry in the 2020s and beyond.
At the moment, the team behind this protocol believes that space is very flawed. On most DeFi platforms, those who earn the most rewards are those who are the first to leave a platform and move on to the next: creating mistrust and evaporating trust. As a result, the highest rank protocols with the highest locked total value are constantly changing.
“Unifi is tailor-made to be an efficient, rewarding and sustainable system. Leveraging the strengths of each blockchain that Unifi stands on, we have created a system where all chains contribute together to form a complete tokenomics model, ensuring the success of the entire protocol, ”said Unifi CEO Juliun Brabon .
Unifi says it’s not a clone of an existing protocol – and instead, the project says it will deliver a sustainable tokenomics system that looks more like a blockchain than a conventional DeFi protocol. This is demonstrated by their governance token, UNFI, which is proof-of-stake in his model. Unifi offers loyalty rewards to liquidity providers and traders, encouraging a sense of community rather than being a race to come out first.
The protocol adds that the multi-chain approach results in an ever-growing audience with every new blockchain supported – with Ethereum, Tron, Ontology, Harmony, and the Binance Smartchain united through the use of base tokens. In the last quarter of 2020 and running through 2021, Unifi will launch on additional blockchains – and new DeFi services, such as cross-chains swaps and a lending platform, will be released.
To get cross-sector support, Unifi says it has received investments from more than 20 blockchain venture capital firms, including four major exchanges: Binance, MXC, Bibox and HBTC. Unifi’s governance token, UNFI, was recently featured on Binance Launchpool.
By early 2021, all eyes will be on DeFi to see if it can maintain its current size – let alone build on the astronomical growth seen in 2020. Sustainability will be critical to making this happen, and encouraging user loyalty could be the key to success.
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