DeFi is the new ICO—but where’s the utility?

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The DeFi honeypot has grown another billion dollars. The last time we reported on the DeFi honeypot, the total value locked on the so-called decentralized finance platforms had just exceeded $2 billion in total value locked. But now, just 16 days later, the total value locked on those platforms has reached a new all-time high of $3.22 billion.

What gives?

DeFi is the new ICO—its token sales mirror the ICOs of 2017.

For instance, the decentralized governance token YFI hit the market on July 21 at $886.33 per token; but now, just one day later, the YFI token is valued at $1,150.97, about a 30% increase from its initial offering price.

Several DeFi governance tokens mirror YFI’s market activity; however, regardless of how enticing the potential profit may be, DeFi is a bubble, and its market movements don’t really have revenue legs, but rather, rely on speculation.

Where’s the utility?

The most popular DeFi apps allow users to lend and borrow digital currency. Some platforms offer annual interest for users who lend on their platforms. Individuals take advantage of those interest yielding opportunities and often use various DeFi platforms to create arbitrage plays that typically look like this:

1. The trader locks away their digital currency as collateral for a DeFi loan on platform #1.
2. The trader uses their loan to earn interest on DeFi platform #2.
3. The trader uses the interest that they earned from being a lender on platform #2, to pay off their initial loan on platform #1.
4. The trader closes out their position on all platforms and walks away with their remaining profit.

As enticing as the potential revenue may sound, borrowing/lending money does not really create value in the world. 

Beware of the bubble

Ultimately, when you put your money into a DeFi platform, you are speculating that you will walk away with more money than you came to the table with…without actually putting in any of the work that causes an asset to appreciate in value. 

But at the end of the day, no real value-creation is taking place and DeFi comes with significant risks. If the price of the underlying digital currency collateral significantly drops, your collateralized loan can be force-liquidated. In addition, DeFi platforms have become a prime target for hackers looking for a quick and easy payday; so far this year five DeFi platforms have been exploited for millions of dollars total.

That being said, approach DeFi platforms at your own risk, because similar to ICOs, the end of the DeFi era is not going to be pretty.