In 12 months, DeFi has grown into a $ 15 billion industry producing governance tokens that are now worth even more than Bitcoin.
But the rapid explosion of protocols has resulted in significant mounting pain … and fears that the sector is not on sustainable foundations. When interest rates on traditional savings accounts are at a fraction of a percent while income farming is generating triple-digit returns, it is inevitable that questions will arise as to whether this is a suitable bubble.
As Ethereum co-founder Vitalik Buterin pointed out in a recent podcast with Ryan Sean Adams, such sky-high interest rates are “just a passing advertisement created by printing a series of compound tokens, and you just can’t continue printing tokens for compound always. “
SEBA, a regulated crypto bank in Switzerland, hit the nail on the head in September when it released a report asking it, “What happens when the music stops?”
The analysts warned that the current trend of high-yield farming in DeFi was unsustainable – and predicted that only a small handful of logs would survive long-term. In fact, Yearn.finance has already initiated a large number of mergers in the past few weeks to strengthen development resources and expand the liquidity pool.
Although SEBA went to great lengths to emphasize that not all high-yield farming has no value, the company added, “High-yield farmers made money by switching from one protocol to another. As long as there are buyers for new protocol tokens, yield farmers can keep switching between protocols. When buyers stop accepting the other side of the trade, that disrupted activity stops. This trend is clearly unsustainable. “
It showed SushiSwap, a fork of Uniswap, as an example. After the launch, countless other food-themed forks appeared. “When the markets took a bad turn, all but SUSHI corrected by more than 99% and became almost worthless,” wrote SEBA analysts.
The bank ultimately drew parallels with the dizzying ICO boom in 2017 and 2018, when most ambitious projects failed the test of time.
Unfortunately, the headaches in the DeFi area don’t stop there. This year, Ethereum established dominance as the main blockchain for protocols – and according to DappRadar, this network held 96% of the total transaction volume in the DeFi ecosystem in the third quarter of 2020.
As Cointelegraph reported in September, alarm bells were raised about Ethereum’s scalability issues – and transaction fees soared to an all-time high. Although it is hoped Eth2 will dramatically increase the network’s capacity, experts warn that it could take years to complete the transition to proof-of-stake. Until then, the industry may have had no choice but to look for alternative blockchains.
Research firm BraveNewCoin recently addressed these challenges in a report that identified 18 serious non-financial risks for the DeFi sector.
“The scalability risk is also the risk that Ethereum itself will not scale properly so that DeFi protocols will function sustainably over time. When network activity is too high (as it has been lately), smaller investors are discouraged and the “accessible” aspect of DeFi is removed as smaller investors earn rewards that are below the fees required to do so. The scalability risk affects not only investors but also the protocols, ”wrote BNC.
And all before we mention the myriad of smart contract security flaws that have resulted in millions of dollars of capital being sucked out of the DeFi ecosystem by malicious actors. High profile incidents seem to happen almost weekly – which hurts investor confidence and threatens the industry’s long-term potential.
Changes are needed if the sector has the prospect of building a significant presence in the crypto industry well into the 2020s and beyond, according to Unifi, which has already rolled out five different blockchains.
Currently, the team behind this log believes the space is deeply flawed. On most DeFi platforms, those who get the most rewards are the ones who get off a platform first and move on to the next step – creating distrust and making trust disappear. As a result, the high-level logs with the highest total blocked value keep changing.
“Unifi was specifically designed to be an efficient, rewarding and sustainable system. We are leveraging the strengths of each blockchain on which Unifi is based and have created a system where all the chains together form a complete tokenomics model that ensures the success of the entire protocol, ”said Juliun Brabon, CEO of Unifi.
According to Unifi, it is not a clone of an existing protocol. Instead, the project delivers a sustainable tokenomics system that is more similar to a blockchain than a traditional DeFi protocol. This is demonstrated by the governance token UNFI, which includes proof of deployment in its model. Unifi offers loyalty rewards to liquidity providers and traders, creating a sense of community rather than being a race to be the first.
The protocol adds that its multi-chain approach is leading to ever larger audiences with every new blockchain supported – with Ethereum, Tron, Ontology, Harmony and the Binance smartchain being united through the use of base tokens. In the final quarter of 2020 and through 2021, Unifi will introduce more blockchains – and new DeFi services such as cross-chain swaps and a credit platform will be released.
To get cross-industry support, Unifi has received investments from over 20 blockchain venture capital firms, including four major exchanges – Binance, MXC, Bibox and HBTC. UNFI, Unifi’s governance mark, was recently featured in the Binance Launchpool.
As of the beginning of 2021, all eyes will be on DeFi to see if it can maintain its current size – let alone build on the astronomical growth of 2020. Sustainability will be crucial to achieve this and building customer loyalty could be the key to success.
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