Right now, there is a staggering $8.9 billion locked up in DeFi – mainly thanks to the new craze of “yield farming”.[i]
(And if you haven’t heard about yield farming before, then I’d recommend reading my article “Here’s how investors are making 100%+ yearly returns “Yield Farming” crypto”, to get you up to speed.)
This new craze has seen an influx of scam tokens flood the market, making massive profits, swiftly followed by complete capitulation.
The prime example of this being “Hotdog”.
The token went from virtually nothing to over $5,000, stayed relatively stable for a few hours and then crashed down below $1 in five minutes flat.
But Hotdog has been far from the only token to follow this trend…
It’s 2017’s ICO mania all over again
What we’ve been seeing in DeFi is basically the same as the Initial Coin Offering (ICO) craze we saw during 2017’s legendary bull run.
Back then, projects would write a whitepaper detailing how their crypto was going to change the world in some magical way, hype it up across various different medias, conduct a token sale, make millions and then exit scam… leaving investors high and dry.
Of course, not all ICOs were scams. Some of the biggest and most reputable projects today were launched through ICOs… including Ethereum itself.
But back then there was no regulation and no consequences for creating scams… at least that’s what the scammers thought.
As time went on, the powers that be educated themselves and began retroactively going after some of the more obvious scams.
They also brought in strict Know your Customer (KYC) and Anti Money Laundering (AML) rules that made ICOs much less of a “wild west”.
Crypto purists hated these new rules as they excluded many ordinary people from getting into new projects unless they were “accredited investors”.
After all, crypto is supposed to be free from government interference, decentralised and independent.
But the new rules meant ICO scams became (mostly) relegated to the past.
So what changed?
Decentralised exchanges make crypto trading difficult to regulate
The fundamental idea of crypto is that it is decentralised. No third-party is needed in its networks and no central authority can control, censor or shut it down.
But paradoxically, most crypto is traded on centralised exchanges.
The exchange holds customers’ cryptos and facilitates any trading. If an exchange chooses not to list a certain crypto then you can’t trade it.
Back in the ICO craze of 2017, one of the main triggers for any given crypto shooting up in price was getting listed on a major exchange.
Listing on a big exchange could send a crypto shooting up hundreds of percent. It still can and does.
But recently decentralised exchanges (DEXs) have been gaining popularity.
I wrote this about them back in 2018:
The way current exchanges work is this:
- You deposit your cryptos into their wallet.
- You then exchange those cryptos for different ones and pay their fees for setting up the trade.
- You then withdraw your cryptos back into your own wallet and pay a withdrawal fee.
While your cryptos are stored on the exchange, you are extremely vulnerable. You are handing over complete control of your cryptos to that exchange. And you are paying it high fees for the privilege.
The difference with a DEX is it never holds any of your funds.
You simply make the trade and it matches you with the buyer or seller at the best price out there.
The trade is then done through a smart contract, so the other party can’t scam you.
At no point does the DEX hold any of your funds. It simply sets up the exchange, finds the best price and creates the smart contract that lets you execute the trade.
A DEX doesn’t have any say in the cryptos you can trade on it. It’s merely a platform where buyers and sellers can find each other and trade freely.
In the same way that governments can’t regulate, censor or shutdown Bitcoin, they can’t regulate, censor or shutdown DEXs.
There’s no need for a costly ICO when you can just launch your project on a DEX
Today, ICOs are only really viable for major players.
The cost and regulatory hurdles in place mean that smaller projects have been pushed out of the space.
And this regulation has also pushed regular people out of the space in favour of venture capital.
You could say this is a good thing…
But crypto is about giving power to the people… not to the corrupt institutions that caused and profited from every major market crash since 1929.
So what many projects have been doing recently is simply skipping the ICO process altogether and “listing” on DEXs, in what are now called Initial DEX offerings (IDOs).
(Gotta love all the acronyms in crypto… sigh.)
- They don’t have to pay outrageous fees to “get listed”. Binance, for example can charge $250,000 or more for a listing. [ii]
- They don’t have to comply with KYC and AML regulation.
- They don’t have to worry about the SEC suing them for $100 million (at least in theory).
- They can list instantly and open up investment to anyone, anywhere in the world.
- And they can let the market decide what their project is worth – rather than a bunch of VCs.
The promise of insane profits has brought a tsunami of money into DeFi and DEXs
Up until a few months ago, DEXs didn’t really have enough liquidity to make them competitive with centralised exchanges.
But the new wave of DEXs have incentivised crypto holders to supply liquidity to their exchanges by rewarding them with tokens.
If you supply liquidity to these exchanges, you accumulate tokens, which you can then trade on the same exchange for more of the crypto you used to supply liquidity…
And then use that to supply more liquidity…
And then get more tokens and trade them for more crypto and then… you get the picture.
This is basically how yield farming works… but usually with an additional layer of leverage.
And some DEXs are paying 1,000%+ APR for supplying liquidity to certain cryptos… which you can then leverage up and make even higher yields.
As you can imagine, the promise of insane profits has brought a tsunami of money into DeFi, and DEXs.
Which is why the amount of money locked up in DeFi has gone like this:
Source: DeFi pulse
And it’s also why last month, one of the most popular DEXs – Uniswap – passed Coinbase Pro in trading volume.[iii]
Many DeFi projects are an inch away from disaster
Given how easy is to launch IDOs, new DeFi cryptos are popping up on the daily.
And many of them are either outright scams, or copy and pastes of other popular projects… which promise even more insane yields than the DEXs they are being launched on.
As I’m sure you can imagine, and as Ethereum’s co-founder and Lord and Saviour, Vitalik Buterin points out, this isn’t exactly sustainable:
And as we’ve seen earlier this year, if the crypto market suffers a big correction, it can completely wipe out DeFi investors and yield farmers.
If the market crashes we’ve seen in crypto – and around the world – towards the end of this week continue, there could be a lot of unhappy yield farmers by this time next week.
But the massive demand DeFi is creating for Ethereum-based cryptos is also having other, interesting, consequences.
Ethereum “killers” are gaining traction as DeFi craze spikes network fees
Right now, all of the popular DeFi projects and DEXs are built on top of Ethereum.
In fact, if you look at the top 100 cryptos by market cap, most of them are built on top of Ethereum.
But as you may know, Ethereum doesn’t deal well with massive network demand just yet. (That’s part of the reason Ethereum 2.0 is so hotly anticipated.)
And so transaction fees have gone through the roof. It currently costs more to send an Ethereum transaction than a Bitcoin one.
Here’s a chart of the average Ethereum transaction fees since the start of this year:
As you can see, they’ve gone from basically nothing to over $10.
And the fee to execute a smart contract can be in excess of $200.
All of this has led to a new popularity in “Ethereum killers” – projects vying to become the #1 platform crypto and topple Ethereum’s crown.
Ethereum has the network effect, developer pool, first mover advantage, name recognition and perhaps most importantly, trust.
But until Ethereum 2.0 finally ships, other projects arguably have better technology… and are gaining traction.
I would say the top five most popular “Ethereum Killers” right now are:
- Polkadot – currently sitting in 7th on coin market cap after its tokens became tradable on the 18th of August.
- Cardano – currently sitting in 13th place on coin market cap.
- Cosmos – currently sitting in 22nd place on coin market cap.
- Tezos – currently sitting in 15th place on coin market cap.
- Algorand – currently sitting in 39th place on coin market cap.
And I’m planning to dedicate next week’s coin confidential to sussing them out.
Some of them, like Tezos, I’ve written about fairly extensively already. But others have yet to make it into any of my articles.
Unfortunately, I won’t have time to go into too much depth on any of them, but I’ll do my best to give a brief summary of their positives, negatives, red flags and future potential.
Coin confidential is really just a hobby for me at the moment, and I have recently gotten very busy with other projects, so I can only afford to dedicate a few hours a week to this site.
However, if there is demand for a more in-depth report on these, or any other promising crypto projects, I’ll try find the time to write one later this year.
Okay, that’s all for this week.
If you thought this issue was worth a pot of tea, you can buy me one here.
Thanks for reading.
[i] https://defipulse.com/ [ii] https://finance.yahoo.com/news/binance-accepted-250-000-list-131310409.html [iii] https://cointelegraph.com/news/defi-explosion-uniswap-surpasses-coinbase-pro-in-daily-volume