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The total value locked in decentralized finance (DeFi) projects has peaked at over $250 billion in December 2021 and remains at around $62 billion as of mid-August. In 2022, capital flees the crypto space amidst wars, inflation spikes and other surprises. We may still have some in stock.
But unlike previous cryptocurrency bull markets, it wasn’t just retail interest that drew this capital in the first place. Rather, major institutional investors who recently opened up to crypto have rapidly increased their appetite for the yield DeFi is known for. But with winter approaching, the pitfalls of high-yield platforms have become more apparent.
You can’t create value out of nothing
In a sense, value is always subjective and defined by personal considerations and goals. A photograph from a family collection means more to that family member than to a random outsider. Because it is very important to their business.
Yet even the simple example above shows that value often depends on real-world situations and processes. For farmers it is quite quantifiable thanks to the free market that brings together entire industries, governments and consumers into sophisticated, more or less functional systems. That creates value defined by yield, followed by a wonderful economic life cycle as these products move through the market.
Yield is a big word for the blockchain industry, especially its DeFi sector. In the DeFi sector, he has lost billions of dollars in value since May in the ongoing bear market. Still largely a nascent industry, cryptocurrency as a whole has been largely untouched by the real world economy, especially when it comes to non-speculative trading. And while DeFi yields may seem favorable at first glance, the question is always where they come from.
Related: Terra infection reduces UST-related DeFi protocols by more than 80%
The sad story of Anchor’s demise is a perfect example of how unsustainable the business model behind DeFi protocols is. The nearly 20% yield was officially due to on-chain financing, but received an injection of funds to continue operations. This is a clear indication that lending is insufficient to sustain earnings. Given Anchor’s prominence as a pull factor across the Terra blockchain, we can take credit for its dubious yields by bringing down the entire ecosystem.
Likewise, there is the fact that on-chain loans tend to remain on-chain within largely siled blockchain ecosystems. Onchain protocols can only lend onchain tokens, and as you know, onchain assets are not well integrated into the real world economy. So, whether targeting arbitrage opportunities or betting loans on another yield protocol, loans create little in terms of real-world value, in contrast to traditional financial lending. And healthy yields don’t come out of nowhere.
has an off-chain life
The lack of real-world value underpinning the yield and overall offering is a major Achilles heel in the cryptocurrency scene. Many people compare Bitcoin (BTC) to digital gold, but gold has many other uses besides being stored in bank vaults, from the jewelry industry to electronics. And while Bitcoin’s wild shot on the moon can’t be replicated, its use case keeps gold afloat even as the veneer as an inflation hedge fades.
The crypto space needs to abandon the insider mindset of baseball and try to move beyond on-chain activity and establish a greater foothold in real-world economies and processes. It should experiment with use cases aimed at competing with financial and other services in the traditional marketplace, as well as enabling them.
We’ve already seen some of the biggest names in the DeFi space written on the walls. are moving to business models with healthier yields generated by intercompany lending. The entire blockchain industry should follow this direction.
Related: Do Kwon is reportedly hiring a lawyer in South Korea to prepare for the Terra investigation.
Exploring this real-world use case must go beyond the core set of financial services. A vast number of services need to be powered, from distributed data storage and identity solutions to Internet of Things and mobility applications. The machine world is a particularly interesting use case because machines running 24/7 are a great source of liquidity driven by real-world value. This liquidity could unlock a range of new DeFi business models and offer an opportunity to switch some of the existing protocols for healthier yields.
The days of endless yields shot to the moon may be over, but there are plenty of intriguing real-world activities just waiting to be chained together. We provide a model to enable projects to deliver returns to investors based on real, tangible results while delivering risk management benefits. Blockchain adoption is not just about trading bitcoins from bank accounts. This is a process that can and should transform entire industries and business models.
By establishing a presence across multiple real-world industries and sectors, the blockchain space can reap more than just healthier yields. In the long run, with enough effort and polish, this will ultimately turn her Web3 dream into a self-fulfilling prophecy. A blockchain-based internet must start with a multitude of decentralized apps and services, slowly but surely taking over centralized competitors.
Till Wendler is co-founder of peaq. He previously served as Head of Operations at Advanced Blockchain AG from 2017 until 2020. He also served as CEO of blockchain services company Axiomity AG.
