Crypto Trending 2020 Part 3

24 September 2020

Yo, welcome to another article of the DeFi series. Today, we are going to talk about whether DeFi is really a new Ponzi as well as the problems associated with it.

Having joined Crypto since 2016, although it’s not a long time, I have been aware of the biggest problem of the Crypto world: bubbles and promises. As a Crypto product, DeFi is no exception. It is perhaps that we are holding a pile of “shitcoins” that are over-valued without realizing it. It can be said that tokens and DeFi projects are facing many problems, which include Risk, Scalability, and Yield Farming.

I. Risk

Although DeFi is considered a new “financial institution”, its users still have to face a lot of risks. For veteran investors who understand the Crypto market, they know that risks come with returns. Any investment that can be x10 can also bear a relatively high risk. However, not everyone understands this. The majority of investors entering the Crypto market in 2020 are mostly inexperienced. Therefore, they are not aware of the losses they may face. Instead, they often pay more attention to investments that possibly would bring them x10 profit.

So, what are the risks that DeFi investors encounter?

The first risk comes from the “innovative” system of this young industry, which is Smart Contract. In essence, Smart Contracts are terms that are encoded by developers in order to process those terms automatically. However, Smart Contracts are encoded by humans, and humans can sometimes make mistakes, intentionally or unintentionally.

Investing in new DeFi projects is no different. The majority of Crypto investors are not able to find out if there is a problem with the Smart Contract of the project. There is also no court to protect them (except the cour of conscience of the developers). That brings us to another question. Warren Buffett says that you don’t invest in something you don’t understand, so, have you understood what you are investing in yet?

II. Scalability

One of the extremely big problems that DeFi is facing is that the majority of projects are running on Ethereum’s Blockchain. It is worth mentioning here that ETH is still a Blockchain 2.0 which has slow transaction speed and poor scalability. Normally, the transaction speed of ETH will be about 10 minutes. During peak hours, the ETH system is frequently congested. Also, Gas fees are extremely high which makes it incredibly expensive to transfer ETH.

And it is even a worse situation when ETH refuses to update its current version (ETH 2.0). Obviously, if there’s no change, DeFi will not be able to reach the masses (Mass Adoption). Furthermore, this also prevents ETH from taking advantage of the FOMO trend as there won’t be ETH ready for use.

So, why not move the entire world of DeFi to another platform? The answer lies in its projects. The reason why DeFi has become so popular is thanks to Yield Farming and the x10-x100 pumps of the market. And, those pumps are purely for projects running on ETH Blockchain (Uniswap).

III. Yield Farming

In the previous article, I already mentioned what Yield Farming is as well as its abilities. But, Yield Farming also has two extremely big problems, which are complexity and Ponzi Model.