DeFi Drama, Burst Bubble, and Redemption

Zoran Spirkovski

The speed with which crypto innovates and the amount of “degen” capital that they throw at every new project is absurdly incomprehensible to other industries. Even crypto OGs get thrown off by these rapid, unpredictable changes. 

The whole ecosystem started to reminiscence 2017’s ICO craze, even though Coindesk’s Omrak Godbole would beg to differ. In his recent article, he presents the case that the lack of interest in “DeFi” as a search keyword (compared to “ICO” in 2017) on Google is indicative of the “not a bubble” argument. Later in his article, he leverages other relevant people’s opinions to add credence to his statement. 

What Omrak Godbole fails to see, and nitpicks comments based on his beliefs is that the bubble is just getting started, and we see warning signs already. These smart contracts are new to the community, and degens couldn’t care less about what’s in them. They just want to be a part of what’s latest and are willing to risk their investments.

I agree, there’s not a lot of retail investors in DeFi right now, and the only reason is the lack of industry-wide layer 2 solutions that will do away with the fees. I have yet to find a retail investor that’s willing to risk in a new, unfounded project (as they’ve learned from the ICO craze) and pay a premium for ETH transactions.

Don’t be fooled that there’s no desire. Retail investors learned a lot in the past three years, and those of them interested in DeFi have much better news outlets compared to what Google can find. The real deal goes down on Telegram and Twitter. Google doesn’t even compete when it comes down to DeFi. 

We do have a bubble on our hands. I’m no fortune teller, but seeing the passion and energy of the community in DeFi right now, leads me to believe that we are on the brink of a series of highly illogical and improbable decisions. The past week has been more than enough argument to support my perspective.

First of all, transactions. They give us an insight into how active a particular network is. At the time of the BTC explosion (which coincides with the ICO craze, correlation unfounded) fees were as high as $55 for one transaction. Bitcoin’s price was between $12-18k for the whole duration. ETH fees right now, especially for DeFi are rarely below $100. 

I’ve personally seen people pay upwards of $3000 for a single transaction (one that activates a lot of smart contracts at once). At the time of writing, gwei prices are hovering at ~100 and usually ranges between 100-400 gwei. Last year, people were complaining about 34 gwei being “too much”. 

Deep-pocketed crypto degens are gobbling up DeFi like there is no tomorrow. Retail is sitting this one out (for now) as they don’t want to pay $50, let alone $100 for a transaction. Some might buy governance tokens if they get listed on an exchange (Binance listed Sushi). Beyond listed tokens, retail is no interested in risking their portfolio for a chance to get scammed. They are more than happy to wait for better times with scaling technology such as ETH 2.0 and Layer 2 around the corner.

Speaking of scams, Sushi is an excellent example of the wild emotions and ignorance of the community. The developer launched a product based on Uniswap, implemented a governance protocol, and dumped his developer share on the Sushi-ETH trading pair, taking home 34k ETH in a fit of greed. He then gave control over his platform to Alameda, and a few days later gave back all of the ETH

Let that sink in. 

Without getting into conspiracy theories, of which there are plenty, it’s difficult to see any logical explanation for the developer’s chain of decisions. The community now divided with some people accepting his apology, while others are rightly distrustful of his “good” intentions and change of heart.

Where attention flows, scammers go. DeFi is no exception, and just like the ICO craze, it attracts many con artists, fleecers, mountebanks, and other crooks. $20 million was lost in an exit scam by Yfdex in just two days. It wasn’t retail investors that got hurt, but the same DeFi-hyped crypto powerhouses that are propping up the market. Either way, this sort of illogical, FOMO-inspired behaviour is quite indicative of a bubble.

Wrapping up

Undoubtedly, there are fantastic projects in DeFi and free-flowing capital ready to risk on cutting-edge projects. However, this enthusiasm is steadily getting sidetracked, with plenty of retail investors potentially getting scammed, and free-flowing money stolen. 

Bubbles, while retail investors usually propagate them, are not only caused by retail investors. Anybody can be a significant part of a bubble, even decadent, powerful, and willing institutional funds. 

What Omrak Godbole fails to consider is the risk. Risk in DeFi is currently unrealised. A lot of investors right now, do not understand their capital risks. We haven’t had a significant project failure that resulted in locked funds, and I hope we never will, however, we shouldn’t neglect the possibility just because it’s unlikely. 

One adverse event can create significant losses and materialise all of the risks carried by crypto degens, the giants on whose shoulders DeFi currently rests.