{"id":180394,"date":"2021-01-21T00:29:02","date_gmt":"2021-01-21T00:29:02","guid":{"rendered":"https:\/\/cryptoslate.com\/?p=180394"},"modified":"2026-06-09T14:37:15","modified_gmt":"2026-06-09T13:37:15","slug":"despite-initial-pains-heres-why-conditions-are-favorable-for-defi","status":"publish","type":"post","link":"https:\/\/cryptoslate.com\/despite-initial-pains-heres-why-conditions-are-favorable-for-defi\/","title":{"rendered":"Despite initial pains, here\u2019s why conditions are favorable for DeFi"},"content":{"rendered":"

With its record-breaking bull run, Bitcoin stole the public spotlight from the equally explosive DeFi. To be sure, Bitcoin represents a simpler affair compared to DeFi\u2019s cyberbanking, but it too has just started to grow out of its birthing pains.<\/p>\n

2020 had many peculiarities. Mostly, they were negative, but some were positive. For cryptocurrency enthusiasts, the year ended up yielding big gains with Bitcoin\u2019s ongoing bull run. However, the rapid growth of DeFi\u2014decentralized finance\u2014is not just a mere exercise in mimicking gold. For the first time in human monetary history, DeFi made it possible to gain access to age-old financial products\u2014lending and borrowing\u2014without the meddling of banks or governments.<\/p>\n

All you have to do is tether your crypto wallet to a DeFi network and start reaping the gains in the form of high-interest rates, referred to as yield farming<\/a>. This newly opened opportunity to make a quick buck caused a frenzy of activity as we have never seen before. In a short span of a few months, DeFi\u2019s growth went through the roof.<\/p>\n

Although DeFi\u2019s total value locked (TVL) made its first $1 billion milestone in February, the Summer period saw its explosive growth. In a period of seven months, from June 2020 to January 2021, DeFi grew from $1.01 billion to over $25 billion<\/a> as of January 19:<\/p>\n

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Image: DeFi Pulse<\/figcaption><\/figure>\n

Less jaded and cynical crypto users saw this coming. Although it is tempting to frame this awesome growth as a bubble reminiscent of the ICO craze, with its many fraudulent and empty whitepaper projects, DeFi is its own thing. Bitcoin (BTC), Ethereum (ETH), and other cryptocurrencies laid the groundwork for transforming our perspective on the meaning of money. Underpinned by the internet and powered by blockchain, cryptocurrencies have value because they are not under the auspices of central bodies, left to be manipulated as central banks see fit.<\/p>\n

Instead, cryptocurrencies derive the value of trust from more formidable sources: math, cryptography, blockchain, and peer-to-peer (P2P) technology. As such, unimpeded by national borders and calcified monetary mechanisms, Bitcoin is being adopted as a haven amid failed monetary systems.<\/p>\n

From Argentina and Venezuela to Lebanon and Iran<\/a>, it is becoming as much as digital gold as it is a form of payment. Popular small business accounting software Freshbooks even lists Bitcoin as a payment method<\/a> that businesses should consider.<\/p>\n

To add to the noise, one of the world\u2019s largest banks, JPMorgan Chase, bailed out during the 2008-2009 financial crisis, projects that Bitcoin is headed toward replacing physical gold<\/a> as a store of value. Bitcoin\u2019s accessibility has largely increased as well, with investing platforms like eToro now offering cryptocurrency access to U.S. traders.<\/p>\n

Separating the Wheat from the Chaff<\/h2>\n

A glance at DeFi\u2019s growth curve in such a short span can easily mislead someone to think of it as a bubble. In some sense this is true, but not in the sense that matters in the long run. When we talk about a bubble\u2014a rapid rise of market value driven by exuberant behavior\u2014we have to view it in terms of maturation stages.<\/p>\n

DeFi is still in the early maturation stage. We can see this by the overvalued and often memetic governance tokens. These tokens were developed and employed by blockchain developers to give people a tool to shape the protocol platform, vetting, and voting on new features via Ethereum\u2019s smart contracts. Such ecosystems are also called decentralized autonomous organizations (DAOs).<\/p>\n

Within the first months of the DeFi Yield Farming craze, the Compound platform<\/a> with its COMP token rose 300% in value, only to halve in value a month later.<\/p>\n

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Image credit: CoinMarketCap.com<\/figcaption><\/figure>\n

Likewise, Yearn.finance, with its five-part ecosystem of lending, borrowing, stablecoins, exchange, and Aave capital clearance, yielded exorbitant 35,000% returns to the very first wave of adopters. Again, we are seeing a bubble curve\u2014spike and burst.<\/p>\n

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Image credit: CoinMarketCap.com<\/figcaption><\/figure>\n

However, with both of the Compound and Yearn.finance examples, we see a stabilization period, just like we have seen with countless altcoins. Only those DeFi platforms that offer value rise to the top. With the DeFi space, such value is far more tangible than the previous era of thousands of altcoins uselessly vying to dethrone Bitcoin while offering nothing extra in return.<\/p>\n

On the other hand, DeFi platforms are explicit in the value they provide:<\/p>\n