Amid the excitement about DeFi, analysts are warning of a possible repeat of what happened to ICOs in 2017. They recommend doing careful research before investing money in a DeFi project.
The crypto community will remember 2020 as one of the most important years. Amid a new Bitcoin bullish run, the crypto world is starting to feel enthusiastic about the emergence of new decentralized finance (DeFi) projects. However, several analysts warn of the overexcitement of DeFi.
It is important to note that ICOs are one of the most interesting mechanisms in the crypto market. They help new blockchain companies or projects obtain financial resources from the market, thus emulating the process of initial public offerings (IPOs) of traditional companies.
However, unlike IPOs, new projects in ICOs do not issue shares that investors buy. They rather allow buying a token within the blockchain, which can generate huge profits, if successful. If the project fails, the token value will be zero.
Given that no institution regulates ICOs, they are high-risk investments as they are a decentralized process. Big companies like Binance and innovative projects like Ethereum have emerged from ICOs. These have allowed the millionaire scam to thousands of people, after having invested in hopeless projects that then disappeared.
New Challenge from DeFi
Logically, the excitement about DeFi projects causes concern in the crypto market, in the face of the possibility that the history of ICOs repeats itself. This time, that would happen through failed decentralized finance projects.
DeFi projects, like ICOs, are mechanisms for decentralized financing through blockchain technology. In the case of DeFi, the objective is to grant loans in the same way as a traditional bank, but in a decentralized way, through smart contracts. This is the main difference between ICOs and DeFi.
People can invest money in a DeFi project, which another person will borrow, use, and return with interests, with these being the profit for the first investor. They do this without the need for a decision-making entity to intervene.
Probability of History Repeating Itself with DeFi
The excitement about DeFi has led this sector to increase in value by 291% from USD 3.4 billion to USD 13.4 billion in just three months, according to data from CoinMarketCap. It has been able to do this with projects such as yearn.finance, Chainlink, and Just, seeing its value increase several times in a matter of weeks.
For this reason, Changpeng Zhao has called for calm from the crypto community, remembering that only the best DeFi projects will survive in the long run. Therefore, everyone wishing to enter the sector should conduct careful research before risking their capital.
Fortunately, the difference between what happened to ICOs and the current situation with DeFi is that the crypto world now has a much stronger infrastructure. Companies like Binance and organizations like Tron Foundation provide a modicum of confidence in the market, while crypto users are much more informed and better connected than before.
Even if there are winners and losers with DeFi projects, the widespread scam situation of 2017 is unlikely to happen again. For that reason, everyone must ensure that the platform where they decide to invest has the technical capabilities that it promises.
By Alexander Salazar
