DeFi is a revolution but like all uprisings they can implode with the smallest of hitch or get crush by the boot of the established order. They are also mostly brought down from within.
Crypto is plagued by hitches. How could it be otherwise. If you can’t make omelettes without breaking eggs, you cant build a Crypto future without breaking heads, wallets, smart contracts, laws, rules of established common sense etc.
Ethereum, the blockchain on which the Defi revolution is built is meant to be a decentralised computing device that can be used to run programs that in turn speak to a Bitcoin style blockchain You can think of it as a virtual ATM if you like, if that is how you want to use Ethereum. This is how the DeFi people want to program Ethereum and the programs are called ‘smart contracts.’ There is no reason a smart contract could not obsolete all the tens of thousands of bank branches in the world that put even Bitcoin to shame for their colossal global energy footprint. In fact computers are doing that slowly but surely anyway but in a centralised way the banks still own.
So far so good. Think of the glory of a financial world run by no one but enabled by disparate and diverse owners of a vast network of computers. All those government and corporate wonks would be obsolete too and at last we would all be free of middle men scamming, chiselling and slicing and dicing us out of our hard earned cash.
After an explosion of tech genius will sweep away all the old disreputable gatekeepers. Hurrah!
This breakthrough is why Defi tokens are exploding in value. Their price charts looks like 1999 (for stocks) and 2017 (for Crypto) all over again.
I myself am up to my ears in these tokens and have made amusing money from them so far, BUT….
….. there is a huge black cloud hanging over the whole arena.
Transaction fees.
As DeFi exploded, so has Ethereum and the cost of executing ‘smart contracts’ for Defi applications has gone ballistic.
It is simply not viable to use these sites at the current costs unless you are swinging in big sums.
You are talking of $10, $30, $100 in Ethereum to execute a single transaction on various of the significant platforms. I wont name and shame any particular one but when you go to pop $1000 on deposit and earn 3% a year on a stablecoin, expect to be asked for $10 perhaps $20 or more to do so. That’s a ‘nope’ for lodging that money on the hope of earning $30 in a year. Sure it makes sense if you are dropping $50,000 to $100,000 into one of these systems, but I for one don’t have that much trust right now with all that might go wrong to do that and most simply don’t move money on that scale period. I’m happy to play with a few thousand, but not when suddenly I’m $20 a click away for doing anything, including withdrawing it, with my money.
Right now, at these costs, DeFi is a non-starter. Im not going to place a bet of Donald Trump losing the election if it costs me $80 in fees. Is anyone? I don’t think so.
These charges were meant to be cents not dollars but the boom in DeFi has stuffed up the Ethereum network and the transaction costs have gone ballistic.
So a cynic would say, ‘well that was a quick bubble to get busted. Defi is over already.’
It could be. But…
Crypto has an amazing way of getting around its problems. Here are a off the cuff list of ways that will fix this issue.
Ethereum is changing the way it operates from miners to ‘staking’ nodes. This should crush transaction costs.
Ethereum could tweek its current system to increase its computing power and make the network less congested some other way.
Defi platforms could shift to other Ethereum-a-like blockchains which can cope with DeFi’s demands. (A good punt for speculators to play)
Platforms could re-engineer their (likely bloated) code to run faster and cheaper.
Other technical solutions can be magicked up to decongest the current process like the sort of voodoo behind Bitcoin’s lightening network or some other nerd sorcery.
Its easy to look at new tech and say, that is impractical, it doesn’t operate on current available technology fast enough to be viable, but that is always a mistake. I know I made it in computer games 35 years ago. The winner in tech development always abuses computer resources and win because those resources always balloon to catch up and the greedy code dominated the lean code with its juicy plumpatude.
“It will never work” is famous last words in technology.
What is more DeFi is a cat and it is out of the bag and while the barn door might be jammed the horse has bolted. If you have tried DeFi, you will have had an epiphany moment and even after later being dismayed at the current transaction costs, you still know this hitch is just a hiccup.
The key players now will form the core of this DeFi future and while some will wither through bad luck, hubris or incompetence, many Crypto tokens in this segment, now worth hundreds of million, will in 10 years be worth hundreds of billions.
Once again, this is a buy and hold and buy the dips game where the smart investor will ride the oncoming rollercoaster winnowing away the losers from the winners.
So when you start hearing doomsters moaning about DeFi transactions invalidating the whole idea, you can rest easy that this will be the typical pothole in the technology road that all the titans of the Nasdaq had to jar through on their road to global dominance. DeFi will be the same old bumpy track to glory.