- During DeFi summer, TVL touched new highs.
- Scams, hacks, and crypto winter pulled DeFi to the ground.
Decentralized Finance (DeFi) took the industry by storm, but dwindling TVA on its platform asks the looming question, is it dying? With its decentralized capabilities, DeFi was promise to be a worthy opponent of traditional finance. Many entities and investors poured billions into it but are now questioning their choices.
The Rise of Decentraalized Finance (DeFi)
Decentralized finance promises a way to circumvent the intermediaries in traditional finance like banks and utilizes decentralized autonomous organizations (DAOs) to do the work. It relies heavily on the following pillars. Decentralized exchanges facilitate transactions. Money markets facilitate lending, borrowing, and leveraging—stablecoins like DAI and Perpetual Swaps of digital assets.
All these pillars were permissionless, meaning that anyone from anywhere could access them, plus they worked without intermediaries. These benefits garnered extensive interest from investors who promised a unique and profitable financial experience. But lately, their interest is dwindling, as seen in these platforms’ declining total value locked (TVL).
It also allowed DeFi degens, a group of people who push the limits of a Decentralized Finance (DeFi) platform by congesting networks, making transactions costs higher. Certain underlying factors kept decentralized finance from becoming the promised transparent and easily accessible system. Also, these factors are believe to be early signs of DeFi’s impending doom.
In 2020, the DeFi sector was booming like crazy and was consider the next step in the evolution of finance. This period is called DeFi summer and coined terms like TVL, yield farming, spring in and DeFi blue chip, etc. TVL jumped 2,100% at the time, making it an essential member of the digital asset community.
Factors that Dented DeFi Reputation
In 2021, DeFi started adopting a base layer to facilitate smart contracts. But the influx of these dApps built off the Ethereum base level causes the gas fees to rise to astronomical levels. Specific innovations were made to reduce the gas fees, which called in investors who pushed TVL and capital to new highs.
In 2022, the Decentralized Finance (DeFi) realm was marred with bad events like hacks, scams, exploits, and rug pulls which caused a massive dent in its reputation. The collapse of the FTX crypto exchange and Terra Ecosystem implosion caused huge losses. The factors responsible were poor risk management, lower revenues, and more than require exposure to leverage, flash loans, etc.
Projects promised excessively high yields to attract customers but needed to generate a stable income to back these claims. When users discovered the flaws, they withdrew their liquidity and sold rewards. This caused a severe drop in token prices and TVL, creating more panic and a downward spiral of price pressure.
Experts argue that Decentralized Finance is far from dead and can potentially bounce back. Protocols are learning from past mistakes and using the lessons to develop better-decentralized finance enthusiasts named DeFi 2.0.
Can AI be a Saviour Angel for DeFi?
Microsoft and LeverFi recently announced a groundbreaking solution, hoping to restructure decentralized finance. Morpheus, the promised solution would tackle the underlying problems like security, vulnerability, insufficient risk management protocols, and manual operation insufficiencies.
Artificial Intelligence could help better assess countless possibilities provided by decentralized finance and its protocols. The current DeFi phase is like a bell curve, learning from its mistakes and preparing to bounce back stronger.