Could A DeFI Bust Come After The DeFi Boom? Why Education is Crucial

By Luciano Nonnis, CEO and Founder of DXone

Decentralized finance (DeFi) has gone viral, but it’s not a new phenomenon. This blossoming concept in crypto and blockchain has gained popularity since 2017, back when decentralized lending projects started to be released. At that time, there was little interest in these budding lending and collateral solutions. The market had yet to fully mature. Today, market interest in DeFi applications has led to soaring investment into the space. 

From crypto to traditional finance, most people become interested in markets to make money. DeFI is no different. As the hype-machine kicks into overdrive, and mainstream media begins covering DeFi, the excitement will snowball and the niche will boom. Even projects from 2017 will be brought back to life. The DeFi apps of 3 years ago––lending, borrowing, and liquidity providing––can now actually solve their intended problems.

Although DeFi today solves real world problems, the hype often stems from greed. People recognize they can earn a lot of money in the growing DeFI markets, and the verve threatens to create a second ICO-mania style phenomenon. New projects will appear with verbose white papers and slick landing pages as vehicles to raise money, but will be deficient in robust technology and innovation. 

In many cases, the DeFi boom will be driven by people who just want to make money quickly, and don’t care about mass adoption and the decentralized technology movement. On top of this dilemma, those following these purveyors of hype won’t know how to determine whether a protocol is well-made or not. As the DeFI market grows in this shallow fashion, the overall education of both builders, investors, and users will decrease. 

Where we see hyper-growth, we see untenable bubbles. And not long thereafter, we see the bubble burst. We’re being carried along this dangerous path yet again. While this genre of hype and mass adoption helps increase awareness about the emerging technologies, we must be cognizant of the blowback. Uninformed investors will almost certainly lose out, and the more this happens, the more difficult it becomes for worthwhile projects to earn credibility instead of permanently damaging the reputation of crypto and blockchain.

Since so many people will make rushed investments into the DeFi market, looking only to profit as opposed to building sustainable technology, we will ultimately see a huge crash once the hype wanes. Those entering DeFi now, not to change the world, but to make a quick return, will abandon the market as swiftly as they entered. They’ll wait for the next money train to leave the station.

The importance of educating the general public of not only the technology, but of the risk posed by confidence-men with their vaporware has never been more acute. Most of the projects from the coming DeFI boom are destined to fail. The one-percent of the market which earnestly tries to solve a problem has a better chance of building a lasting technology and business.

If you’re not an expert in this market, there are certain things to keep in mind - technology, team, and market interest. To understand which projects are worth investing in, it is crucial to have an understanding of the underlying technology. Those projects built on Ethereum, for example, should have a plan beyond Ethereum, which will likely face many scaling challenges. Projects need an approach to change to a zero transaction fee and scalable protocol. If they do not, they will not be viable long-term.

Before investing in a project, consider the team and the experience of the people behind it in your evaluation. How long have they been in this industry, and how well are they versed when it comes to solving the issues they are trying to solve? The market is complex, and they need to be properly prepared to manage the risks.

Overall market interest in a project is also imperative. You can scan a project’s social media accounts, but remain vigilant of scam tactics as many thousands of followers can obviously be bought with the click of a button. Monitor the overall engagement and quality of discussion on a project’s social media accounts with its followers. Try out tools such as Google Trends to compare search interest between projects, and follow Google News to keep abreast of high-quality media mentions.

Press coverage can also be bought, so be sure to determine if a published article is genuine. If the article seems overly promotional, there is a chance a project paid for the article to be published, which is not an indicator of market interest.

People will start jumping on the DeFi bandwagon in droves and the mainstream press will daily cover the next big thing in DeFi. At that point you know the sun is setting on the boom—the bust is soon to follow. In order to see this coming, you must at all times be cognizant of the true size and sentiment of the market.

The builders among us, who believe in the possibility of decentralized finance, will be left in the boom’s wake. From a trader’s perspective, there will be a lot of projects to invest in. But long term sustainable solutions, which solve a problem thanks to competent founders, are one in a million. In the event of a market crash, the wise investors who evaluated the market with the long view in mind will be the ones who still stand to profit after the mania.

Sophisticated financial professionals work in today’s crypto market. In part due to their presence, blockchain and crypto have established a very competitive market. In order to grow the crypto markets further, an increasing need for liquidity, decentralized cryptocurrency, and derivatives exchanges will remain. This is how markets grow sustainably. This is what the crypto markets need.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.