DeFi Risks You Should be Aware of According to CoinShares

in crypto •  2 years ago 

In the rush for the latest mega-APR, I suspect many forget to consider the risks. One not mentioned in this decent CryptoNews article is the manipulated TVL of so many small defi products - perhaps that falls under ponzinomics.

7 DeFi Risks You Should be Aware of According to CoinShares

The actual CoinShares report can be found here - just download the PDF.

And here is a quote of precisely what I thought was missing in the CryptoNews article.

Total Value Locked (TVL) decreased 70% to $70 billion, mostly due to a fall in token prices rather than withdrawals.

Why?

A popular technique used by DeFi protocols is to reward users and contributors with its governance tokens. This practice has been successful in attracting users and bootstrapping the ecosystem, however the issuance of these tokens is inflationary and has caused downward pressure on token prices. As the inflationary rewards persist, token holders continue to lose value, which further incentivises them to sell. The rewards are then worth less and contributors leave in search of higher yield elsewhere. Overuse of these monetary incentives across the sector stimulated unsustainable growth during good times and compounded the decline in activity and pricing of DeFi during bad times. The decline in token prices reduces the value of protocols’ treasuries which in turn requires greater selling to maintain a protocol’s funding runway.

Although even CoinShares doesn't spell it out, the manipulation of a protocol's TVL appears rampant, and all we're seeing now is that the smart money jumping from one protocol to the next has nowhere to go as all prices are dropping. Hence the followers of the smart money have little capital left with which to follow the leaders.

That merry-go-round has ground to a halt - for now.

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