Defi or Decentralized Finance s very risky compared to Cefi or Centralized Finance. It can go both ways, either highly successful in gaining a lot of profits or a Ponzi scheme to lose all your money. Defi is very extreme, which makes people doubt its usefulness, and regulators are looking into making Defi safer for investors. However, the short answer is not we cannot make Defi safer because Defi will eventually become Cefi again.
Here is a 1 min summary of the article if you want to skip the reading.
Goals of Defi
Defi is a financial product without third-party interference. Because there is no third party, there is potential to make large profits from financial products. This is because the investors can put their money into a pool with other investors so that everyone gains from the pool.
Problems of Defi
Because there is no third party, one can withdraw their money at any time. It triggers a large outflow of funds that devaluates the pool immediately. There is an estimated that in the first 24 hours, 42%of funds will withdraw from the pool after gains, the next 24 hours will have 16% of the money withdrawn, and the third day will have been withdrawn by 70% of total funds. Such a pool of money investments is unsustainable but instead prepares for rug pull every time investors put their money into the pool.
How to Fix the Rug Pull
Some of the liquidity pool has locked fund mechanisms only to allow investors to withdraw after specific periods, and then it becomes Cefi. Such mechanisms may only apply to investors but not the creator, such as Squid Game Scam Tokens, who scam away many investors’ funds.
The idea is there are always risks in a financial product. To transfer risks from native tokens of their speculative valuation to crypto projects, one can create a bond as a stablecoin to peg the value of the project. Investors are encouraged to sell their bonds to exchange the project tokens for gaining further profits or control bonds to have steady returns up to 4,000% APY.
The Defi continues evolving and finds its way to make it more attractive to investors. At the same time, there are more innovative solutions to prevent rug pull and scams to protect investors without regulations to turn such products to become another Cefi.
This article is also published in Cryptologist as parnership publication.
Photo by Glenn Carstens-Peters on Unsplash
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Disclosure: The article was written by a delusional author who is possibly a nut job without any questions whatsoever about expertise in the subject matters. You should not believe any words this author wrote or you may experience similar symptoms or even possibly become a nut job.