Is DeFi Doomed?

High angle view of two business employees working together while working on bitcoin development chart in office.

Image source: Getty Images

Decentralized finance is a core part of crypto, but parts of it are unsustainable.


Important points

  • The collapse of Terra sent ripples through the decentralized financial market.
  • There are question marks over the future of Terra and Three Arrows Capital.
  • The amount of money on DeFi platforms is down 65% since early April.

Decentralized finance (DeFi) has taken the spotlight in recent weeks, largely due to the shocking collapse of the Terra ecosystem. The collapse of the network wiped out tens of billions of dollars in a matter of days and shook the entire crypto market.

Related Post:   The 10 Best Cheap Flight Android Apps In 2022

One of the most severe aftershocks so far has been Celsius, a crypto lending platform that paused payouts amid bankruptcy rumors. Another is crypto hedge fund Three Arrows Capital, which appears to be in trouble, although we don’t know the details just yet.

What is behind the difficulties of DeFi?

DeFi — an umbrella term for a variety of applications that cut the middle man out of traditional finance — is a cornerstone of the crypto market. It includes lenders, decentralized exchanges, interest rate platforms, among others. Before its collapse, the Terra blockchain was a stablecoin-based payments network that also hosted the high-yielding Anchor protocol.

Related Post:   The 6 Best Money-Making Apps of 2022

CONTINUE READING: The best places to buy bitcoin

There are many industry experts who would say that some aspects of the DeFi industry have long been a ticking bomb. The only question was what would trigger it and how much damage it would do. Anchor’s 20% APY on stablecoin deposits was exactly the kind of thing these insiders were worried about. It just wasn’t sustainable, and when things went wrong, it quickly spiraled out of control.

Related Post:   Cinema HD Not Working - 5 Best Alternative Apps for Android - Research Snipers

But it’s not so much the specifics of a single platform that pose the problem. It’s a kind of crypto pixie dust that makes people believe that anything is possible just because it’s on the blockchain. That and the fact that with the elimination of the middleman, you also take away many safeguards and consumer protection measures that have grown over decades.

Our top crypto game is not tokenized – here’s why

We’ve found a company that has positioned itself perfectly as a long-term pick-and-shovels solution for the broader crypto market – Bitcoin, Dogecoin, and everyone else. In fact, you’ve probably been using this company’s technology for the past few days, even if you’ve never had an account or never heard of the company. That’s how widespread it has become.

Related Post:   The 5 Best Mobile Time Clock Apps

Sign up today stock advisor and get access to our exclusive report where you can learn everything about this company and its advantages as a long-term investment. Learn more and get started today with a special discount for new members.

Getting started

A report by the BIS – the Bank for International Settlements – late last year warned of the dangers of “high leverage, liquidity mismatches, built-in interconnectedness and the lack of shock absorbers like banks”. Some of these DeFi protocols are extremely experimental and once a domino falls, it can start a cascade. For example, if Celsius and Three Arrows Capital fail, others could follow.

Related Post:   Opinion: The danger of period tracking apps in a post-Roe world

Is DeFi Doomed?

DeFi is definitely in trouble. A useful metric when looking at smart contract cryptos and decentralized finance platforms is Total Value Locked (TVL). TVL is down 30% or more for most top DeFi chains over the past month, according to DeFi Llama. As of early April, the total TVL across all blockchains was over $170 billion. That number is now around $60 billion — 65% down from before Terra’s collapse.

Related Post:   Best Basketball Betting Actions and Apps for NBA Finals Game 6

Some insiders believe this is a necessary move as it will rule out the extreme projects and better position the industry to move forward. Others think it reveals deeper issues with decentralized finance that won’t be easy to solve. These current issues may also spur lawmakers to act faster and create stronger regulatory frameworks for crypto and DeFi, but this will cause more pain in the short term could strengthen investor confidence in the long term. Ultimately, it’s too early to tell, but there are some real risks to consider.

Related Post:   The 12 Best Food Tracking Apps For Android And Ios

bottom line

These are uncertain times and investors would do well to brace for further turmoil. If you have money on decentralized finance platforms, make sure you fully understand how the platform works and how it generates rewards. If you’ve transferred your savings to a high-yield DeFi protocol, tread carefully and consider what might happen to your funds if the platform crashes. Unlike a traditional savings account that has FDIC insurance against bank failures, investors can lose it all.

Related Post:   Best Ontario Sports Betting Sites, Stanley Cup Finals Apps

While DeFi may not be doomed, more trouble could be on the horizon. At the moment, the aftershocks from Terra’s collapse are still being felt, and it’s difficult to estimate how far they will spread. If more projects follow the same path, it will destabilize the market even more and have further repercussions for the rest of the crypto market.