DeFi’s Success Modelled on Bitcoin’s Formula

DeFi continues to garner the attention of retail and institutional investors with incentivized participation, one of the keys to Bitcoin’s continued success. Unlike most of us in 2020, Decentralized Finance (DeFi) has been having a very good year, becoming one of the most compelling innovations in the blockchain space with over $12.27 billion of value locked in the sector (based on 44 providers tracked by DeFiPulse).

There are several factors at play in DeFi’s success, but like a hit song suspiciously reminiscent of the Beatles, the wild enthusiasm seems to be based on a familiar theme of incentivization — just like Bitcoin, but this time farming, not mining. 

Yield farming has captured crypto investors’ attention by allowing investors to earn returns by providing stabilizing liquidity to DeFi protocols.

In function, yield farming resembles the innovative (and famously successful) formula devised for Bitcoin mining which provides long-term incentivization and returns for active members positively supporting the ecosystem. In the case of DeFi yield farming, users are similarly rewarded for positive participation, earning yields for buying and holding platform-native tokens.

The demand for DeFi tokens has grown with more exchanges all over the world adding them to their basket of tradable assets, despite the threat to centralized finance that DeFi poses. 

NDAX.io is the latest exchange to add DeFi, with an announcement touting support for Chainlink (LINK) for the Canada crypto investing audience. Bilal Hammoud, NDAX.io President, CEO, and Founder, said “2020 has shaped up to be the year of institutional adoption of Bitcoin, Stablecoins, and decentralized finance…which provides retail and institutional investors exposure to new crypto products...” (Disclosure: I have in the past contracted with NDAX.)

Changpeng “CZ” Zhao, CEO of Binance, acknowledged the contradiction and potential to cannibalize his own business as his company launched their own DeFi initiative, Binance Smart Chain while maintaining their position as the world’s largest exchange by trade volume. Zhao said, “I’m always much more worried about if we have users using the product. There are always multiple options for business models, so the key is to build something that’s useful.”

DeFi is still considered an untested, high-risk concept by some crypto investors and DeFi Pulse recently announced a risk grading system dubbed the DeFi Pulse Economic Safety Grade which measures the risk of protocols becoming insolvent. 

It took DeFi three years to build momentum, but at over $10 billion in investments, many new protocols are looking to capture the imagination of crypto investors. Of course, the vast majority of efforts will fail or consolidate over time but the promise of yields based on participation continues to drive enthusiastic participation from users.

Justin Roberti has a background in media and fine arts and has been writing and doing PR/marketing for over 20 years for Fortune 500 and startups in media, gaming, consumer tech, mobile tech, fintech, and blockchain. He writes about tech, media, and web culture. He is the PR Director for blockchain agency Zage.io.