When the gas escaped from the ICO bubble market in early 2018, speculators and developers scrambled to find a new way to generate the huge funds and rampant growth previously offered by now collapsed initial coin offerings. DeFi is just the latest in the line of new, and ultimately self defeating attempts to bring back the ‘good old crypto days’
First was the STO (security token offering). STOs are an attempt to legitimise an ICO by acknowledging that the tokens offered are actually securities. Proper STOs were registered with regulators and adhered to the rules of the road. They gave investors more confidence and in some cases, more control. Sadly, the STO excluded regular retail investors, in preference for accredited investors because the projects were extremely risky. And, when real investors – serious investors – started looking at these projects, they all came to the same conclusion: “Why bother? Just sell me shares.”
IEO’s came next (initial exchange offering). One of the significant drawbacks to many of the previous token sale models was that there wasn’t enough liquidity to allow the tokens to be traded. Thus was born the IEO. Projects paid exorbitant fees to centralised token exchange platforms so that they could appear more credible to both investors and, of course, to the crypto speculators. It also meant a ‘baked in’ buyers market for those running IEO’s as the trading community of exchanges were already buying and selling crypto.
However, once serious players started looking in detail at these underlying projects, it quickly became apparent why the teams couldn’t get traditional investment: Their ideas sucked! They had no business model. They had no go to market strategy. They had no product-market fit. The only reason they were able to get any money at all was that the speculators knew how to buy and sell these random tokens to maximise their profits.
For the past year things were pretty quiet on the crypto funding circuit. There were plenty of cryptogeddon moments where dozens or hundreds of altcoins died on a weekly, sometimes daily rate (or when their token values dived to near zero -same thing really)
There were the green shoots of something new. This new thing was DeFi – Decentralised Finance. I go into detail about this so-called ‘miracle’ crypto ecosystem in Part 1 of my ‘Crypto Circus’ article series right here on CryptoAM.io
Again, once serious players started looking at the underlying projects, it became apparent why the teams couldn’t get traditional investment. Their ideas sucked!
One of the biggest things to come out the DeFi movement was the idea of a decentralised crypto exchange. Anyone could buy and sell just about any token pair they wanted. For those who had a bunch of crypto sitting around in their digital wallets, they might actually earn a bit if they moved their altcoins to these decentralised exchanges and create liquidity pools. The most famous of these (as of publication date) is Uniswap.
One unique thing about Uniswap is that it is 100% reliant on people making money through arbitrage against other centralised exchanges. The game theory behind Uniswap is that there will always be opportunists watching for a price shift either on Uniswap, Coinbase or some other exchange, and that they will exploit that gap and thus create price elasticity and levelling.
There are several decentralised crypto exchanges. Some work like Uniswap and some work on a digital order book basis more akin to traditional markets. Buy and sell orders are placed with crypto locked in the smart contracts until the orders are either executed or expire.
However, in the past month, all of the attention has rapidly shifted to pool-based exchanges.
To add even more complexity (which is what the crypto community just looooves to do) – there is a new game in town: Yield farming which is supercharged by liquidity mining. Is your head spinning yet? If not, have some more candy floss from the clown around the corner and let’s keep this crypto circus tour going!
A side-hustle in decentralised exchanges (and a lucrative one) is insurance. DeFi has no regulators, and thus it has zero protection for investors. If there is a run on the exchange and you can’t get your crypto back it’s “Sorry, not Sorry, down to your bad luck.” Luckily, someone spotted this gap in the market. A handful of companies were born to offer you both peace of mind and security in the event your crypto investments go up in a puff of pink smoke.
Of course, extremely experienced software developers write all tokens. All of the code is thoroughly audited for both technical and tokenomics flaws before going into production. Each of the companies and teams is rigorously vetted by the regulator of their home jurisdictions. All of their identities are available in public registries.
…And if you believe that, then I have a little bridge for sale in Central London – it’s a bargain.
All of the code is audited for both technical and tokenomics flaws before going into production – NOT!
Anonymity is still one of the biggest draws to crypto land. And if you can’t be entirely anonymous, at least you can be pseudonymous. Eventually, people want to take their crypto out and turn it into fiat where they can do something with it (other than yield farming and liquidity mining). To date, there are still precious few ways to use crypto to pay for your dinner, your engagement rings or your mortgage.
And those gateways back to real usable spendable money need to be compliant with all of those pesky regulations like KYC, KYB, AML, CTF and all the other three-letter acronyms that make people hate banks.
Here’s the reality: The majority of the software involved in cryptocurrencies are written by highly motivated and intelligent teams, loosely organised, whose only priority is to get the tokens and smart contracts in the market whilst the market is hot. Tokenomics models are not thoroughly tested (partly because no one can even define tokenomics). Technical audits are done at only the most superficial level because to do a full audit would cost both time and money. This whole DeFi thing is as silly and unreliable as betting on horses because of their names.
But I digress.
Decentralised exchanges like Uniswap, new yield farming tokens like Sushi, Kimchi, spaghetti (and I hear Curry is coming!) are all over the headlines. And it feels a bit like mid-2017 when everyone had crypto fever. What’s different this time is that even amongst the many crypto evangelists, there is an overall sense of caution. Some are loath to go through another public outcry and regulatory push back like in the days of ICOs. Others are focused on their unfailing belief in the one true coin – bitcoin.
And then there are people like me. I see this as just new tokens (nothing more valuable than loyalty points and less useful) being made from companies that I’ve never heard of. I see thousands of people throwing millions of pounds and dollars and euros into a very risky, complex and scam ridden ecosystem. As a well known and deeply respected crypto solicitor told me, “Look. It’s all just a big game”. I agree. But when I go to Vegas, at least I know that the house is the one with the edge. In DeFi it is increasingly hard to tell.
The ultimate DeFi game is one of musical chairs. Liquidity mining is printing money from nothing. Yield farming is playing the arbitrage game with assets that have no value, meaning the gains are not real. And all these people claiming you can earn “interest” on your crypto mean something completely different (doubly so from one project to another) when you dig in.
When the music stops and everyone tries to cash out because the circus is leaving town, make sure you’re not the one who is broke and sweeping up the peanuts – again.
In the final chapter of my three-part ‘Crypto Circus’ series on DeFi, I’ll discuss in more detail the current regulatory landscape and why wheels will be coming off DeFi in the near future.
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Troy Norcross, Co-Founder Blockchain Rookies