Although cryptocurrency exchange and trading have been around for a long time, the term DeFi or decentralised finance was only coined in August 2018. However, it has since spread like wildfire throughout the global finance space with no end in sight.
For most people who aren’t acquainted with the crypto space, it’s hard to see any difference between the crypto market before and after DeFi. As such we will quickly explain what the concept of DeFi is all about.
What is DeFi and the concept behind it?
To begin with, DeFi is to the decentralised economy what traditional finance is to the centralised economy. So beyond exchanging fiat for crypto-assets and vice versa, DeFi is also like a stock market but specifically designed for crypto assets.
More specifically, DeFi, in its own case, eliminates the middleman or intermediary interference during financial transactions, thereby ensuring that the entire end-to-end financial process is completely trustless.
The term DeFi was originally created by a group of entrepreneurs alongside Ethereum developers who were looking for a way to describe the nature of finance in the decentralised economy. They ended up choosing DeFi among several other name options including ‘Open Horizon’ ‘Lattice Network’ and ‘Open Finance Protocols’ among others.
Technically, DeFi being the term used in describing the decentralised economy also doubles as an ecosystem within which decentralised financial applications (aka dApps) are built and operated by a network of users.
Furthermore, DeFi is characterised by the same attribute that defines cryptocurrency’s underlying technology, which is the ecosystem’s major driving factor. For instance, DeFi is characterised by its non-custodial, open, transparent, compostable, and decentralised nature, which are the same attributes that define blockchain technology. That said, what is the current state of the DeFi economy?
The state of DeFi industry and the endless rise of bad coins
Although starting out primarily within the Ethereum network, the concept of DeFi has since been generalised and adopted across other blockchain networks that also facilitate the operation of various decentralised applications.
According to defiprime, a media outlet and analytical service provider for the DeFi community, there are currently 238 DeFi projects listed, 215 of which are built on the Ethereum network.
Going by defiprime’s website, the DeFi eosystem is made up of various projects numbering up to 18 categories. Current DeFi projects according to defiprime, include those that facilitates the following;
1. Alternative Savings, 2. DAOs & Governance, 3. Infrastructure & Dev. Tooling, 4. Lending & Borrowing, 5. Payments, 6. Staking, 7. Analytics, 8. Decentralised Exchanges, 9. Insurance, 10. Margin Trading, 11. Prediction Markets, 12. Tokenisation of Assets, 13. Asset Management, 14. Derivatives, 15. KYC & Identity, 16. Marketplaces, 17. Stablecoins, and 18. Yield Aggregators.
Every single DeFi application that exists today, whether listed or not, falls into one of the above categories. However, some DeFi applications combine multiple projects, making them far more dynamic and multifaceted than those that just facilitate a single project.
That said, because of the dynamic nature of the DeFi ecosystem, each dApp project tends to have its own native token. Moreover, there are some utility tokens which are purposely designed so they can be traded within the DeFi ecosystem, even when they do not offer any genuine value. Most times, these tokens are referred to as ‘s**tcoins,’ which is an umbrella term used in addressing all the spin-off of failing or already failed cryptocurrencies.
As of Today, the DeFi ecosystem has witnessed the rise of so many failed cryptocurrencies. However, the reason for their failure can be attributed to various factors ranging from unfit technology to rug-pulls, pump and dump and as previously said, the majority of these tokens lacks definable purpose nor fundamentals to back their existence.
Sadly, while the original intention behind most of these bad coins is to swindle investors of their money, many people proceed to fall victim either because of a lack of relevant knowledge in the field or as a result of greed. Talking about greed, a lot of investors now see the majority of the DeFi projects as a get rich quick scheme and often end up with big losses as a result of their blind investment.
Existing airdrop culture and its negative impact
One of the major attractions of DeFi is the existing airdrop culture. If you’re wondering, an airdrop is a process of sending a free cryptocurrency token to a potential investor’s wallet address. Typically, the goal of this move is to raise awareness for a new coin among the general public as well as to attract and onboard new investors.
However, while this has remained a bait used by token creators to get the attention of the masses, they find a way to manipulate the asset as well as to lock in their investment.
According to a Cointelegraph discovery, token creators often orchestrate a ‘honeypot scenario’, in which investors can only acquire but not sell their asset for a year or more, particularly at the early stages of investment.
Also, for those who received airdrops for free, the token developer alters the coding of the smart contract in such a way that those who received airdrops begin to see an increase in their asset and are misled into investing actual cash.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.