Analysts identify 3 critical flaws that brought DeFi down
The cryptocurrency market has had a rough go this year and the collapse of multiple projects and funds sparked a contagion effect that has affected just about everyone in the space.
The dust has yet to settle, but a steady flow of details is allowing investors to piece together a picture that highlights the systemic risks of decentralized finance and poor risk management.
Here’s a look at what several experts are saying about the reasons behind the DeFi crash and their perspectives on what needs to be done for the sector to make a comeback.
One of the most frequently cited reasons for DeFi protocols struggling is their inability to generate sustainable income that adds meaningful value to the platform's ecosystem.
Fundamental Design Principles for DeFi:- If the protocol doesn’t work without a reward token, it’s a Ponzi schemeA reward token should not be necessary for a protocol to function. That means the protocol is not a revenue generating business.
In their attempt to attract users, high yields were offered at an unsustainable rate, while there was insufficient inflow to offset payouts and provide underlying value for the platform's native token.
This essentially means that there was no real value backing the token which was used to payout the high yields offered to users.
As users began to realize that their assets weren’t really earning the yields they were promised, they would remove their liquidity and sell the reward tokens. This in turn caused a decline in the token price, along with a drop in the total value locked (TVL), which further incited panic for users of the protocol who would likewise pull their liquidity and lock in the value of any rewards received.
A second flaw highlighted by multiple experts is the
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