“Very Dangerous and should be regulated”
Last Thursday, September 16, The Economist magazine dedicated its cover to talk about DeFi, which, for being an economics and finance editorial of the last century, the criticism of this new movement was not so severe, “very dangerous and should be regulated “are some of the words the author of the article (RabbitHole) used to describe DeFi. A similar but deeper approach and with views of leaders within the ecosystem was carried out by Fortune magazine.
I would like to add the component of “DeFi innovation cycles” to the description “very dangerous and should be regulated” to better understand what distinguishes movement as DNA of strength and determination.
The Economist is not wrong in telling its audience that They must be careful when they decide to invest in this new sector as they are risky investments within experimental protocols, But this could encourage certain cognitive biases and even cloud the complete view of what is happening.
DeFi could seem like a house of cards, fragile and waiting for everything to collapse in financial, security and regulatory terms, Either due to a failure in the risk estimation of a loan protocol, due to a hack within the Smart contract or due to the prohibition of operations in a country such as the USA or England in protocols with volumes such as Uniswap.
DeFi Innovation Cycle
But these three elements instead of being a negative aspect for not investing, it is the structure and fuel of the DeFi acceleration that happens all the time and that allows the ecosystem to evolve in a way never before seen in the traditional financial market.
DeFi innovation dynamics are very different from the innovation cycles of other industries, it seems that every 3 months we go through the cycle of over-expectation that Gartner proposed, starting with the launch going through the euphoria and ending with the disappointment.
In the last month we saw the price of SUN, the native cryptocurrency of the Solana Blockchain network until it reaches its maximum price of USD 191, this according to CoinMarketcap numbers. The price growth that lasted more than three weeks in constant increase was stopped in a vertiginous way by a critical failure at the infrastructure level, that is, for more than 8 hours no blocks were generated, something extremely serious when it is argued that a decentralized technology is immutable and resistant to censorship. I did not remember anything similar since 2018 when all the nodes of the NEO blockchain were shut down.
There are different versions of the fact that attribute the responsibility to bots that tried to push the price of an IDO within Radyum, the main automatic market maker, a kind of Uniswap of Ethereum but within Solana that managed to block the network by issuing up to 4,000,000 transactions per second, until the theory of a direct attack, at the same time something very similar happened with Arbitrum, a blockchain network that seeks scalability in the second layer and that had taken a great acceleration in a few weeks.
This is not something unique, it has happened all the time in the crypto ecosystem and far from blocking the growth of the movement it encourages and incentivizes it in a cycle never seen before. The first event of great impact and magnitude was the attack on the DAO protocol in 2015 that gave rise to a new Ethereum that separated from the “Ethereum Classic” project and this, far from encouraging the growth of Ethereum, strengthened it.
DeFi is not the only market with the characteristic of resilience and anti-fragility, traditional financial markets are also full of historical facts of bank failures, institutions and even cyber theft.
Economic incentives and technological openness
The difference is that innovation cycles are open to everyone’s scrutiny, to learn, propose and build. A few hours after the critical failure of Solana we already had a very good idea of what had happened, how long does it take for the same to happen with a financial system, for example Switf in Europe or STP in Mexico.
In addition to the openness of technology and information, the economic incentives to build allow small teams to capture large amounts of money with very low friction and very quickly, as is the case with Solana and even Arbitrum, which within a few weeks of its launch to Main Net they got more than USD 2 Billion in Total Locked Value (total locked value).
What a dangerous Rabbit Hole could be for traditional financial media, and experimental where investors could lose large amounts of money in the absence of regulation, for others it could be the largest space for creation and financial innovation ever seen before.