More On: defi
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Often referred to as the
The promise of financial inclusion and freedom has helped DeFi gain popularity.
Scams, rugpulls, and exploits have an easier time getting through to users. Here's how we're going to remedy the situation.
Diffusion of Information, Version 2.0 Why aren't we done yet? An emphasis on community education and environmental stewardship is what Aldrin CEO Hisham Khan believes in.
Origin of DeFi 2.0
While DeFi is sometimes referred to as "the wild west of finance," the reality is that it is a completely decentralized system where investors and users may make their own decisions with their digital assets because there are no intermediaries.
DeFi has gained popularity over time because of its promise of financial inclusion and independence, as well as its ability to create initiatives. Intermediaries' fees can be eliminated, but investors must assume full responsibility for their investments in return.
As the DeFi, blockchain, and crypto ecosystems grow, they become increasingly prone to frauds, rugpulls, and vulnerabilities that have plagued them from their infancy.
Hacks and exploits cost a staggering $10 billion last year. It's not always easy to manage the dynamic interaction between investors and capital providers in projects and platforms.
Growth hacking schemes like yield farming and staking are used by many platforms to encourage token holders and investors to supply liquidity and money, but when the rewards run out, there is a big sell-off that causes price drops.
A reduction in the price of a token may have a devastating effect on the long-term growth of the platform, while rewarding mercenary conduct and penalizing long-term investors.
For example, a project called Olympus DAO has arisen, in which they hold their own treasury and liquidity and utilize it to create an independent reserve currency with a backing price for their tokens. In the case that the token price falls below the backing price, the protocol will use the treasury to buy back and burn tokens to stabilize supply.
The evil side of DeFi 2.0.
Despite the fact that the premise appears revolutionary and logical in theory, there are additional complications that require investors to follow the Nash equilibrium and the 3,3 game theory, where all parties must cooperate to win by performing the following three steps: purchasing, bonding, and staking.
Essentially, the reason behind this is because
Investors and project members who own tokens profit from the increased worth of their token holdings when there is an increase in the price.
Investors can acquire tokens at a discount, which is released over a vesting time period (typically five days) from the protocol, and the monies are invested in the treasury of the protocol. As with seignorage in traditional finance, the protocol reaps substantial gains from this with little outlay (TradFi).
Third, staking, in which investors "lock up" their tokens with the system, further boosts the price and maintains it healthy, while receiving token incentives that are added over time.
As a result of this paradigm, massive sell-offs and price declines are inevitable as selling pressure rises with price increases, resulting in more cascades from panic selling.
Excessive issuance of new tokens can also lead to hyperinflation, as has happened in the past in nations like Greece, Hungary, and Yugoslavia. While the protocol treasury may be used to burn tokens and cut supply in order to stabilize prices, the funds are not endless and will most likely run out over time, causing the backing price to spiral downward..
Especially when the protocol treasury is constructed only with investor funds and does not organically implement to generate extra value if no fresh investors are present (hence the similarity to ponzi schemes).
Is this the beginning of a new era of success stories?
Time Wonderland, a fork of Olympus DAO, has gone the road of a specialised purpose acquisition company (SPAC), with seed investments and a suite of goods such as liquid staking protocols to create profits, diverging from the original DeFi 2.0 initiative.
Despite the fact that these success stories have yet to be set in stone, the fundamentals remain the same: innovative and interesting business functions are great marketing tools, but solid tokenomics, utility, and clear communication and education are what will determine long-term success and growth.
Even though these enormous platforms appear to have a formula for success based on their business strategies, they have encountered difficulties due to investor misunderstanding as well as damage to their reputation and trust as a result of scandals.
Additional considerations include the design of token holding and vesting periods for the project's leaders and participants, as well as the implementation of a multisig and secure wallet to safeguard the protocol's funds.
Community, education, and open communication are all crucial jigsaw parts that are now missing.
In addition to explicit tokenomics and roadmaps, even somewhat successful protocols overlook the significance of caring for ecosystems as a whole, as well as communicating with and educating their community.
While it is reasonable to think that many investors in such complicated and experimental initiatives are sufficiently informed and aware of the risks they are taking, the reality is far from that.
Anyone, regardless of financial literacy level, can engage in DeFi because no screening or KYC processes are often required. With DeFi, anybody from a rural mother in Mozambique to a CEO from a Fortune 500 business has the ability to invest, but that can also be a double-edged sword. This financial inclusion is part of the beauty of the platform.
Code and smart contracts are extremely simple to grasp, allowing any new technology to be quickly cloned or recreated in a similar manner by another project team without appropriate internal and external comprehension.
Individuals with questionable pasts who otherwise wouldn't be considered reliable enough to hold significant responsibilities in DeFi may be allowed to continue their destructive activity and affect the reputation and security of the company.
What the Founders' Role Is
Rugdoc and other platforms like it should be used to disclose the history of project founders and other important individuals with investors in an open and transparent manner. Instead of giving them an easy way out at the first indication of difficulties, they should be held responsible for navigating through setbacks and accomplishments. A higher amount of risk will be assumed by investors otherwise.
DeFi, blockchain, and crypto ecosystem protocols aren't only competitors and rivals, but rather comrades who work together to grow up the ecosystems. Hacks, exploits, and other bad events that affect a single project's reputation tarnish the reputation of the space as a whole. Projects and their communities should stop operating in silos and instead focus on building each other up, since everyone has something to offer to the overall health of the space.
There should be a strong emphasis on frequent AMA sessions on project channels such as Twitter and Discord to dispel misunderstandings, as well as straightforward pieces on announcement channels such as Medium. The full potential of DeFi can only be realized if it is used properly.
To ensure that the DeFi, blockchain, and crypto ecosystems mature in 2022, effective communication and education, as well as norms of responsibility, openness and mutual collaboration between project leaders and the investment community, will be critical factors.
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