It would be fair to say that decentralized finance — better known as DeFi — has become Ethereum’s killer use case.
Nothing shows this as well as Uniswap, an Ethereum-based decentralized exchange that literally processes more than 100,000 transactions a day. For context, there are only seven entire blockchain networks that regularly process over 100,000 transactions a day. The $10 billion value of DeFi coins based on Ethereum also shows the importance of this market segment to the network.
Ethereum founder Vitalik Buterin warns against DeFi hype
The number of users interacting with DeFi contracts on Ethereum has gone exponential in recent months as noted by on-chain analysts. This is for good reason: by issuing new tokens, DeFi protocols have managed to create schemes where individuals can make hundreds or even thousands of percent per year on their investment.
Despite the gains that are possible, Vitalik Buterin isn’t advising his followers and Ethereum users to rush right into using the protocols. On Aug. 14, he wrote:
“Reminder: you do NOT have to participate in ‘the latest hot defi thing’ to be in ethereum. In fact, unless you *really* understand what’s going on, it’s likely best to sit out or participate only with very small amounts.”
Reminder: you do NOT have to participate in “the latest hot defi thing” to be in ethereum. In fact, unless you *really* understand what’s going on, it’s likely best to sit out or participate only with very small amounts.
There are many other kinds of ETH dapps, explore them!
— vitalik.eth (@VitalikButerin) August 14, 2020
Buterin added that there are “many other kinds of ETH dapps,” referencing the many other use cases for Ethereum that are non-financial in nature.
The point he made that DeFi is especially risky to those with little technical or economic knowledge has been accentuated by a debacle that took place just days ago.
Just two days after it launched, the Yam Finance protocol, whose native token is YAM, suffered due to a bug in one of its contracts that resulted in the loss of $500,000-750,000 worth of user assets. While the $750 million worth of crypto deposited in the protocol was never at real risk, the hundreds of thousands of coins lost likely belonged to hundreds of investors.
The issue was that many didn’t understand the risks of investing their capital in the manner that they did, suffering financial losses as a result.
Is it sustainable?
Along with warning his followers not to get too deep into DeFi without acknowledging risks, Buterin has also said that how this segment of Ethereum is growing is inherently unsustainable.
Speaking with crypto journalist and podcaster Laura Shin, he said in July that DeFi’s growth is being subsidized by cryptocurrencies issued by protocols that will eventually run out of coins to distribute, or else risk devaluing the asset to zero.
“It’s a short-term thing. Once these enticements disappear, you could easily see the yield rates drop back down to close to 0%. […] That’s not something that could make DeFi break, but it should definitely be a sign that [this isn’t something] we should be pushing it out in front of the entire world [right now].”
— Laura Shin (@laurashin) July 29, 2020
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