The DeFi summer has been an exciting time for many. It’s been a high-octane roller coaster ride, marked by insane wins and millionaires seemingly made overnight.
Unfortunately, in the midst of the crypto winter, that ride has now slowed. Many projects that received tremendous hype without delivering on promises have been exposed as scams, Ponzi schemes, and meaningless “shitcoins.”
As the global cryptocurrency market cap has fallen from all-time highs of $3 trillion to less than a third of its former glory, many naysayers have also viewed crypto as just a farce offering empty promises of generational wealth.
Over $4.2 billion has also been lost to DeFi (decentralized finance) exploits, meaning security and accountability are far from ready for large-scale adoption.
While there was a time when hype and meme-based platforms flourished, Crypto Winter proved that a sustainable foundation cannot be built on the bedrock of hype and expectations.
DeFi, once hailed as “the future of finance” due to its ability to break down geographic and wealth barriers through methods like yield farming, has also been relegated to an “online casino.”
All of this has a silver lining – namely that bear markets remove unprofitable projects and force occupiers and builders in the space to focus on utility and practicality.
Without the fog of euphoria and get-rich-quick mentality as a distraction, we can more rationally search beneath the surface for answers to important questions.
One such question, often swept under the rug, has been, “Where does the yield come from?” In many unfortunate cases, the answer is, “If you still don’t know, the yield is you.”
Builders need to double down on practicality and utility to provide users with sustainable, non-ponzinomic returns to restore damaged faith in DeFi and unleash its potential.
Real Yield: Just a pipe dream or more than a meme?
The weakening financial markets and the increasing number of failed or closed platforms are also fueling skepticism about promised returns and leading to the hunt for “real returns”.
The story goes on
In the realm of intangible “internet magic money”, having external and organic revenue streams for a platform that is not solely dependent on new investors (proper tokenomics rather than ponzinomics) and returns in blue-chip assets or stablecoins is as real as it is delivers gets
In line with this growing trend, many platforms have started touting themselves as “real earnings” providers to attract user interest, but how do we spot the wolf in sheep’s clothing?
It may take time and effort to research and understand, but looking beneath the surface to understand the protocol’s revenue generation mechanisms will almost certainly help.
While it’s not particularly appealing or exciting to hear, most real return platforms fall under the following strategies rooted in traditional finance: (1) lending and borrowing through asset collateralization, or (2) options and structured products .
The trade-off for real yield is that the annualized percentage returns (APY) provided will be much lower than the “degenerate” returns that characterize the DeFi summer, which can be in the four-digit range and higher.
Instead, users mostly have to settle for single- to double-digit returns on blue-chip assets like Bitcoin, Ethereum, or established stablecoins.
Mathematically, chasing those high APYs might make sense, but Crypto Winter has shown that those high returns are unsustainable.
Many of these platforms offer rewards in the form of “farm tokens” or shitcoins, which inevitably tend to zero or turn out to be outright scams or pyramid schemes.
Therefore, for yield farmers who insist on chasing those high APYs, they risk losing all their capital.
DeFi is not just an online casino
While there are users who are happy to take high risk for high rewards, the same is not true for the majority exploring DeFi.
The promise of DeFi lies in decentralization and financial inclusion, not degeneration. Its core value proposition is to eliminate reliance on intermediaries and provide self-managed ownership of assets and wealth.
While most users find banks and other traditional intermediaries to be safe and reliable, even for countries with established financial systems, this is not an absolute must. Past events such as the 2007-2008 financial crisis and the collapse of Lehman Brothers, the fourth largest investment bank in the United States, have proven this.
Even with the most secure bank accounts, users are always at risk of access censorship, whether it’s bank runs, transfer limits, or lengthy verification processes.
Also, unlike bank accounts, your self-custodial wallet used in DeFi cannot be frozen and you retain full ownership of your own assets at all times. While this comes with its own set of risks like hacks and exploits, this can be mitigated with proper wallet hygiene, security audits, bug bounties, and other best practices.
With improvements in security and accessibility, DeFi has tremendous potential to be the next iteration of funding for users with self-managed assets and wealth.
‘Simplifi DeFi’ to achieve mainstream adoption
Another key DeFi value proposition is simplification through the automation of smart contracts. Although the underlying technology may be complex, this is a challenge for developers, not users.
On the front end, the user interface (UI) and user experience (UX) can be designed to allow users to complete a chain of transactions with the click of a button. You just need to know the relevant factors to consider for each action such as: B. The underlying risks and expected results.
This can be particularly useful for covered calls and other advanced trading strategies that are familiar to financial experts and experienced traders, but not to the average person.
With automated smart contracts, users only have to focus on how much their capital is at risk and what kind of conditions to look out for.
For example, strategies such as a covert call that are complex to manually analyze and execute can be dramatically simplified through automation. All users need to know is the expected profit and risks of each strategy, they need to choose how much to invest, when to withdraw funds and how often to monitor their deposits.
Smart contracts also do not discriminate between users as long as required parameters are met, meaning CEOs of Fortune 500 companies and minimum-wage workers all have equal access to DeFi.
It’s often been touted that DeFi needs to be so easy “even your grandma can use it,” and Crypto Winter is the prime time for builders to focus on making that a reality.
It’s time to “simplify DeFi” so everyone can access it seamlessly and securely, and focus on sustainable returns and practical innovations in battle-tested financial strategies. Only then can we restore confidence in DeFi’s potential for financial inclusion and empowerment.
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