The growth of decentralized finance (DeFi) this year has been, to put it mildly, exponential. From a market of just a few million dollars, total value locked (TVL) in DeFi is now approaching US $16 billion. From this space, we have seen projects emerge that have truly transformed the digital finance game: platforms that have given savers the ability to turn their traditional currencies into stablecoins and other tokens that have allowed them to earn a real return on their money for the first time in more than a decade.
Moreover, their popularity has led to some exceptional gains for token holders of some of DeFi’s biggest platforms. These include, notably, yearn.finance, whose native token is currently trading somewhere around $27,000 — up from $790 in July (though below an extraordinary peak of $43,000 in September). The significant returns to be made by trading tokens like these resulted in an elaborate system of liquidity mining that has proved extremely lucrative for those able to quickly and skillfully navigate DeFi’s complex infrastructure.
Short-term gains, long-term losses
However, these huge potential gains have also attracted a large number of day traders and short-term speculators to the DeFi space. The advent of fully decentralized exchanges (DEXs) like Uniswap and SushiSwap — where new tokens can be listed by anyone at any time — has created a sub-sector of DeFi participants that are focussed purely on the initial gains that can be made soon after a new DeFi token is listed. By monitoring and trading new token issues, such actors have been able to make many times their initial investment by quickly selling their holding when the token lists.
Of course, this strategy isn’t anything new. In traditional finance, currency and derivative traders have been taking advantage of arbitrage opportunities in much the same way for decades. It is, however, arguably short-sighted. While small gains can be made by hopping from one new launch to another, the real wealth will be realized by those truly passionate about DeFi’s mission to democratize finance. These investors, who usually invest in strong projects that are providing concrete solutions — and who hold on to their tokens — will be the big winners of DeFi over the long-term.
In the larger cryptocurrency space, we can draw comparisons with early adopters of Bitcoin (BTC). Those that bought-in during the relatively early days of 2013 when BTC was trading at around $135, for example, would have seen a $1,000 investment grow into $163,192 by 17 December 2020. As most will know, this seven-year period has seen some wild swings for Bitcoin — not least the crash that saw it plummet from nearly $20,000 in December 2017 to around $5,000 a year later. However, everyone who believed in the core mission of Bitcoin and the blockchain technology it founded and held on, have been rewarded. They are also no doubt gratified as they watch institutional investors that once labeled Bitcoin a ‘scam’, now pile in.
Innovation equals real wealth creation
We can also draw comparisons with early investors in the companies that have come to define our modern area. Amazon, for example, enjoyed a strong pump in the first dot.com boom of 1999 but crashed spectacularly in 2000 when the bubble burst. It remained well below its first $113 peak until 2008, only really picking up steam after the financial crisis. Investors who believed in the future of online retailing and stuck with the firm and are now enjoying a share price of $3,240. Even with 10 years of lost investing opportunity, this still works out to an average annual return of more than 18% for Amazon’s early investors.
Meanwhile, early investors in fellow internet pioneer Google — which listed on the stock market in 2004 — have enjoyed gains of 3,144% to date, turning an initial $1,000 investment into $31,440. Facebook has seen a 621% gain since it listed in 2012, while Netflix has witnessed an astonishing pump of 43,274% since 2002, transforming that $1,000 into $432,740. Finally, those that got in on the ground floor at Microsoft’s once lowly competitor, Apple, have seen gains of 98,215% since 1990. Without exception, mainstream investors all once balked at every single one of these companies, much to their later detriment.
DeFi winners will reshape finance
Just as those early pioneers did for technology and the internet, the current leaders in DeFi will reshape finance in a way few of us can imagine today. The space will only get stronger and stronger as users and investors come to realize the true value that genuine DeFi projects offer, rather than seeing it merely as a playground for short-term gains. The key will be to seek out those projects and protocols with solid products that are providing genuine, quantifiable solutions and that are backed by highly experienced teams that have proven themselves to be long-term actors in DeFi and cryptocurrency.
Some projects already showing their worth include platforms such as Aave and Compound, which brought the borrowing and lending to DeFi that has made so much of the ecosystem possible. This innovation opened up entirely new avenues for DeFi, without which leading DEXs would likely be shadows of their current selves. Chainlink, which introduced the oracle data streams that now power the smart-contracts behind almost every DeFi protocol, is another strong example. And we have already mentioned yearn.finance, whose innovative vaults that allow users to pool their capital to find optimum returns were the first step toward making DeFi more accessible to novice users.
A new DeFi wave to build on early progress
Long-term investors in projects like these have already been rewarded, but these rewards are likely only a glimmer of what is to come. As the next wave of innovators enters DeFi, change will likely come thick and fast, with new offerings building new bridges between the world of traditional finance and DeFi. At YIELD, we have developed our platform with this aim firmly in mind. With our innovative investment funds, we are aiming to bring a new group of mainstream users into DeFi — a group that will ultimately tilt this emerging space toward widespread adoption. This will propel every project in DeFi toward its end-goal: to fully democratize finance by making wealth creation and preservation available to everyone.
Traders chasing after short-term gains from initial token listings and other arbitrage opportunities will probably remain a feature of DeFi, just as such actors remain a feature of traditional finance. They are, arguably, in many ways an essential part of the ecosystem. However, the true winners will be the investors who enter DeFi with a belief in its core mission, as well as a strong understanding of the current and future landscape. Cryptocurrency and DeFi harbor enormous potential to transform finance, and — just like those that believed in the power of the internet — early adopters will reap the benefits.