Imitation is nothing new. Animals use it for survival, artists wield it for inspiration, and businesses rely on it for success. It is particularly prevalent in technology, and the crypto space is no exception. Since Bitcoin’s creation, developers have tried to copy and improve upon the original idea, and we can partly credit blockchain’s prosperity to those who believed in the idea and set out to make it better. But if imitation is the highest form of flattery, crypto must be among the most sycophantic arenas in the world.
Some of the earliest Bitcoin clones include Litecoin and DOGE, which both copied Bitcoin’s architecture and tweaked it ever-so-slightly (commonly referred to as “forks”). There’s nothing inherently wrong with this, and it can make crypto really fun. Forks have also contributed to the overall health and growth of the space by building communities and empowering individuals. However, DeFi seems to have an obsession with imitation, and it may be hurting investors in the long run.
Watching the advent of new ideas is one of DeFi’s most exciting aspects, and 2020 has been a wild year in that regard. The emergence of protocols like Uniswap, YFI and Ampleforth has challenged our assumptions about how finance works. Unfortunately, these pioneering concepts have led to hundreds of copycat projects who might not have your best interests at heart. Today, we’re going to discuss why new ideas in DeFi are worth researching, but how to avoid getting caught in the hype and losing.
Reflection or saturation?
One of the trendiest DeFi projects lately has been reflect.finance (RFI), which achieves “frictionless” liquidity mining by taxing every buy and sell transaction and distributing it back to token holders. In other words, you don’t have to do anything except hold the token to receive your rewards. Your share is sent directly to your wallet, cutting out the need for adding liquidity or staking tokens. It’s a clever way to streamline the process, but there are some caveats.
First of all, projects like RFI wither if there’s low volume; low volume means fewer transactions, and fewer transactions mean less tax generation. When token holders realize that the value is going down and the tax isn’t offsetting their losses, an exodus occurs. Some projects have tried to solve this by only taxing sell-side transactions (thereby encouraging people to hold) or by sending a portion of the tax back into the liquidity pool to increase its size. In almost every case, however, these projects have slowly dried up as investors move onto the next shiny new clone. The end result is a heavy pump when the token lists, followed by a fast descent once investors lose interest.
RFI’s performance compared to several clones
We’ve seen this cycle happen before. Previously, Ampleforth kicked off a swell of ‘elastic supply’ protocols (in which the token supply isn’t fixed and routinely adjusts to hit a target price). Before that, Statera jump started the idea of DeFi index funds, and YFI popularized liquidity mining. Early adopters usually did extremely well, but latecomers haphazardly latched onto unscrupulous clones in hopes of duplicating others’ gains.
This hurts long-term investors and creates distrust between them and developers. Furthermore, it exasperates and exhausts buyers. Improving through imitation does inspire innovation, but it doesn’t have to come at the cost of investors’ money and trust. By the same stretch, traders need to understand the risks of plunging into zero-utility clones that provide no real benefit to the DeFi ecosystem. Understanding what is valuable and what is fraudulent will prepare them for the next cycle.
Leading DeFi platforms usually achieve success because they solve an existing problem or engineer new ways of profit-making. However, most investors can’t dedicate all of their time and resources to keep up with DeFi’s break-neck speed. At YIELD, we believe the DeFi ecosystem’s next logical step is sourcing the best market-neutral strategies to let users stay on top of the market without having to constantly monitor it. Ultimately, YIELD provides users with seamless access to DeFi’s best function: A way to generate a passive income that exceeds anything possible in traditional finance.
Altcoin and DeFi trading is particularly difficult when Bitcoin surges
DeFi is an exhilarating space, and the next year will undoubtedly feature some exciting and unexpected developments. However, knowing what protocol is best at what time takes a painstaking amount of time and effort. YIELD makes open finance accessible, safe, and reliable for everyone regardless of their technological background. Furthermore, you can sit back and make profits without wading through the endless barrage of new (and often risky) projects. For more information about how YIELD can benefit you and take the stress out of DeFi investing, check out our page about the YLD token and calculate your rewards!