Market cryptocurrency has been in a lot of trouble this year and the collapse of many projects along with some funds has caused a domino effect, affecting everyone in the space.
The difficulties are not over yet, some details make investors put together a picture that highlights the systemic risks of decentralized finance (DeFi) and poor risk management.
Here's what some experts are saying about the reason behind the crash DeFi and their views on what needs to be done to get the field back on track.
Does not generate sustainable revenue
One of the most frequently cited reasons why protocols DeFi troubled by the inability to generate a sustainable income to add meaningful value to the platform's ecosystem.
“Basic Design Principles for DeFi:
- If the protocol does not work and there are no reward tokens, it is a Ponzi scheme
- The reward token is not required for the protocol to work. That means the protocol is not a revenue-generating business.”
In an attempt to attract users, high returns were offered at unsustainable rates, while there was not enough inflows to cover payouts and provide underlying value to customers. the platform's native token.
Essentially, this means that there is no real value backing the token, which is used to pay out high returns offered to users.
When users start to realize that their assets aren't actually delivering the promised returns, they remove their liquidity and sell the reward tokens. This caused a drop in the token price, along with a decrease in the total value of the locked value (TVL) and further trigger panic for protocol users, who also want to pull their liquidity and lock in the value of any rewards received.
Tokenomic or Ponzinomic?
A second flaw highlighted by many experts is the poorly designed tokenomic structure of many DeFi protocols that often have extremely high inflation rates used to attract liquidity.
High rewards are good, but if the value of the token being paid out as a reward doesn't really exist, then users are essentially taking a big risk when they spend money but get little or no return. somewhat common.
This is largely related to DeFi's revenue generation problem and inability to build sustainable coffers. High inflation increases the token supply and if its value is not maintained, liquidity will leave the ecosystem.
Excessive leverage in defi
“Users who staked this inflation token to over capitalize their positions were liquidated when the price dropped due to the market sell-off. This leads to a death spiral for the protocol. Wonderland.Money is one of the protocols where users took advantage of TIME to borrow MIM and got liquidated.”
In this sense, the real consequences fall on the user for being over-exploited without a solid plan of what to do in the event of a market downturn. While it can be challenging to think about these things during the peak of a bull market, it should always be something on a trader's mind because the cryptocurrency ecosystem is famous for its strong volatility.