The DeFi market is growing exponentially every day. So what are the things that could cause this market to end?
The decentralized finance (DeFi) solutions market has skyrocketed in the past four months as investors are happy to invest cryptocurrencies in various loan protocols to earn astronomically high returns. In March of this year, the total value locked in such protocols was approximately $ 550 million. Now, TVL has risen by 1600% to $ 9.5 billion.
Often referred to as yield farming, the trend is getting stronger as more protocols emerge and investors are in a hurry. Recently, developers have started offering cryptocurrencies with names such as YAM, SUSHI, PASTA, KIMCHI. These tokens have accumulated millions or even billions of staking values within a few hours.
They usually provide very high returns but most come with unsupervised smart contracts that developers clearly warn of the risks involved. Still, people are very happy to invest their money in these cryptocurrencies.
So what are the scenarios that could bring the end of DeFi?
Smart Contract Failure
One of the inherent risks of investing in any type of cryptocurrency protocol, including DeFi, is the chance of failure when it comes to smart contract code. This is true for protocols that are audited and scrutinized, and it’s also true that all the rage is in currently unsupervised smart contracts.
Some of the most popular DeFi protocols in recent weeks are Yam Finance, Spaghetti Money, SushiSwap and most recently Kimchi Finance. As it is known, meme power has been an important part of the community lately, and most of the hottest DeFi protocols are selected from well-known dishes.
In addition to attracting billions of dollars in the locked total value, all these protocols share one thing in common: they are “unchecked”. This means that the developers released them and there are no third-party auditing companies or teams that verify the legitimacy of the smart contract code and whether there are any hidden issues that could be devastating to the investor.
Yam was the first protocol to see a critical error in its code. This is a mistake that makes everything completely unmanageable and makes the “experiment” a temporary failure. As a result, the price of YAM, the protocol’s management token, dropped to zero, hurting everyone who bought it.
A smart contract code error related to liquidity provision in unregulated protocols, consuming millions, if not billions, of liquidity could be utterly disastrous for the DeFi space.
Hacks and Abuses: A Real Concern
They say the best way to predict the future is to learn from your past. In April, a hacker managed to seize $ 25 million of the total locked-in value on a China decentralized finance protocol called dForce Network backed by Multicoin Capital. Now imagine that it is in an unsupervised protocol like SushiSwap with a total value of more than $ 1 billion locked right now. Hacks have posed a threat to the entire cryptocurrency space since its inception. Unlike centralized solutions such as Binance, Coinbase, BitMEX and the like, which usually have an insurance policy to protect their users in such cases, most of the currently trending DeFi protocols are completely anonymous and unprotected. We don’t even know who’s behind the source code, let alone thinking of insurance.
Ethereum Transaction Fees
Most of the DeFi-related transactions take place on the Ethereum network. Here, too, a problem such as transaction fees arises. ETH fees consistently point to all-time highs, leading many to support the idea that DeFi will soon (if not yet) be a privilege reserved only for the rich.
In fact, many users report cases where they were required to pay a fee in the range of $ 50 to $ 120 for a simple stake transaction. This will inevitably make retail investors unprofitable and leave high return opportunities for people with serious capital.
The Big Move in Bitcoin’s Price
Finally, we need to consider Bitcoin. The primary cryptocurrency has been losing its dominance in the market over the past few months. This is because the value of DeFi coins and other large volume altcoins increases. However, if there is one thing that is clear in this area, it is that when Bitcoin becomes parabolic, it kneels on the whole market. A sudden increase in bitcoin price could cause massive FOMO among retail investors, as we saw in December 2017.
It’s also worth noting that many investors are aware of all of the above risks. So it wouldn’t be surprising if a time comes when they want to invest their DeFi profits in something much more reliable. Bitcoin sounds like the most likely option.
All things considered, the DeFi market is currently booming yexceeds and shows no signs of slowing down. Still, most of the time, most trending protocols may experience declines, especially if it looks risky.
Of course, there are many reliable and well managed protocols such as Compound, Maker, Balancer and similar projects that will lead development. However, one misstep can be enough to rock the boat, as trust is one of the most important factors.