Total value locked in decentralized finance (DeFi) projects hovers around $62 billion as of mid-August, down from a peak of more than $250 billion in December 2021. Capital is fleeing the cryptocurrency space amid war, rising inflation, and whatever other surprises the year 2022 may still have in store for us.
However, unlike the bullish rallies of cryptocurrencies, it was not just retail interest that attracted this capital in the first place. Rather, major institutional players, who have only recently opened up to crypto, quickly developed an appetite for the returns DeFi is known for. But now that winter is here, the pitfalls of high-performance platforms have become more apparent.
Value cannot come from nothing
In some way, the value is always something subjective, defined by the personal considerations and objectives of each one. A photo from a family collection means more to a member of that family than to a stranger. In the same way, a farmer would be quite willing to pay for a shipment of seeds, since they are crucial to his business, but a city dweller would probably prefer to pay for the final product.
Nevertheless, even the simplest examples show how value often depends on real-world circumstances and processes. In the farmer’s case, it’s also quite quantifiable, thanks to the free market bringing together entire industries, governments, and consumers into a sophisticated and—more or less—functional system. Definite value in money creates definite value in yield, whether of crops or fruits, and the great economic life cycle continues as these products make their way onto the market.
“Yield” is a word much loved by the blockchain industry, especially its DeFi sector, which has seen its total value locked shed billions of dollars in value since May amid the current bearish run. . Still a largely nascent industry, cryptocurrencies as a whole are not as exposed to the real-world economy, especially when it comes to anything beyond speculative trading. Y As lucrative as DeFi returns seem, the question is always where they come from.
The sad story of Anchor’s demise is a perfect example of how unsustainable the business models behind DeFi protocols can be.. His returns of almost 20% officially came from on-chain loans, but he received an infusion of cash to continue trading, a clear sign that the loans were not enough to sustain the returns. Given Anchor’s prominence as a pull factor for the entire Terra blockchain, its questionable returns can be blamed for the downfall of the entire ecosystem..
Equally revealing is the fact that on-chain lending tends to remain on-chain within the largely isolated blockchain ecosystem. An on-chain protocol can only lend you an on-chain token, and as we know, on-chain assets are not very integrated into the real-world economy. Then, Whether it’s an arbitrage opportunity or a loan on another yield protocol, the loan—unlike traditional financial loans—creates little real-world value. And healthy returns never come out of nowhere.
There is life outside the chain
This lack of real-world value to underpin returns and all supply is a major Achilles’ heel for the crypto sphere.. Many have compared bitcoin (BTC) to digital gold, but gold has other uses besides being in a bank safe, from the jewelry industry to electronics. And while it will never be able to replicate bitcoin’s unrestrained shot to the moon, its use cases will keep gold afloat even when its veneer as an inflation hedge.
The cryptocurrency space must try to abandon its internal baseball mentality and look beyond on-chain activities to try to establish a greater foothold in the real-world economy and processes. The blockchain industry needs to experiment with use cases geared towards competing with financial and other services in traditional markets, as well as advancing the blockchain space itself..
Some of the biggest names in the DeFi space have already had hints that something bad may happen soon. DeFi titans are already looking for exposure to real-world assets, transition to a business model with a clearer risk-reward relationship, and healthier returns produced by business-to-business lending.. The entire blockchain industry should continue in this direction.
This search for real-world use cases should go beyond the basic set of financial services. It should promote a wide range of services, from decentralized data storage and identity solutions to the Internet of Things and mobility applications. The world of machines is an especially interesting use case, as machines running 24/7 present a large source of liquidity triggered by real-world value. This liquidity could unlock a whole host of new DeFi business models and offer an opportunity for some of the existing protocols to switch to healthier returns.
The time for uninhibited returns rocketing to the moon may be over, but there are plenty of real-world activities generating interest just waiting to be brought on-chain. All of them offer more familiar business models, allowing projects to increase their return on risk management, while offering investors returns based on real tangible results. Blockchain adoption should be more than just trading bitcoin from your bank account: it is a process that can and should transform entire industries and business models..
By breaking into multiple industries and sectors of the real economy, the blockchain space has more than just healthier returns to gain.. In the long term, and with enough effort and polish, it is ultimately about turning the Web3 dream into a self-fulfilling prophecy. A blockchain-based internet must start with a series of decentralized applications and services that slowly but surely take over from their centralized competitors, and the bear market at hand is the right time to start building them..
Till Wendler he is a co-founder of peaq. He previously worked as COO at Advanced Blockchain AG between 2017 and 2020 and was also CEO at Axiomity AG, a blockchain services company.
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