Crypto DeFi: can we do it better?
We are witnessing a very important moment for the Crypto industry. The global political situation is still unclear, Covid is still around, the economy is facing the comeback of inflation and the central banks monetary policies are less expansive. 2022 should have been the year consolidation of the crypto market and the year of DeFi blooming, allowing for more direct access to decentralized finance opportunities for many users.
But this can be put in jeopardy because the fragility of some DeFi projects is being exposed. We start hearing someone say that DeFi = Ponzi. Of course if this was true the whole idea of DeFi would crash like a house of cards. Is it? My personal view is that DeFI in general is NOT a ponzi, but there is something we should all discuss about: what makes a DeFi project sustainable? The most common answer would probably be: TVL, Total Value Locked.
We tend to think that having a very high TVL is enough for the stability of a DeFi project. What does this mean? If TVL is high (above 70% for example) the majority of the tokens are effectively locked and cannot be sold easily, reducing the possibility of panic selling events and giving more strength to the token value. Is this enough to make a DeFi project strong? I don’t think so.
I’d like to separate two scenarios: TVL used to validate transaction in PoS systems and TVL to lock away tokens, making it harder to be sold. The first kind is very useful, because users put their skin in the game and put resources in the blockchain validator nodes, making them more resilient and increasing the overall security of the blockchain itself. On the other hand I think that simply locking away funds is a very inefficient way of using resources.
Think about all the funds locked in DEX pools, they are there just to keep track of price and reduce volatility, which is very important, but they just sit there in the end. Billions just sitting in a liquidity pool as a placeholder. I think we could make better use of that money and have a more sustainable DeFi infrastructure. In the traditional economy, investors give money to a business they believe in, and that money is actually used to make the business grow and generate a return on the investments. Money put inside a LP does not give resources that the project can actually use.
There are DeFi projects that actually use TVL to generate returns, like the lending platforms. Like a traditional bank, but without intermediaries, they allow users to provide funds in exchange of a return and allow other users to borrow, paying an interest. This is a sustainable way of generating profits.
I think all DeFi projects should look at sustainability before anything else, while most only rely on hype and hope. As long as the hype is high, the positive inflow of money is sufficient to pay out the rewards, but at some point in time this is not true anymore and everything falls apart. We have some examples of that happening in these days.
DeFi projects needs to make better use of the funds locked in LP and other forms of vaults, we need to have the money work for us, so that we can keep our projects healthy and protect our users investments, repaying their trust in us. If we do this, no-one will ever say that DeFi is a Ponzi. We need to work in this direction to give a future to the crypto industry, so that more and more users can be a part of it and enjoy the opportunities it can offer.
Today I don’t want to talk about USTX and how we’re addressing this issue, this article is not about marketing, it’s about opening a discussion on this theme. I’d like to hear what do other people think about this.
Sirluke, USTX Team