Analysts distinguish 3 critical disadvantages that led Defi to the collapse of
poor risk management, insufficient income and excessive use of borrowed funds - these are the main causes of Defi collapse.
This year, the cryptocurrency market has survived not the best times, and the collapse of many projects and funds caused the effect of infection, which affected almost all market participants. Dust has not yet settled, but a constant flow of details allows investors to add a picture that emphasizes the systemic risks of decentralized finance and poor risk management. Here's what several experts say about the reasons for the collapse of Defi and their views on what needs to be done to revive the sector. Inability to generate sustainable income One of the most frequently mentioned reasons for the failures of the Defi protocols is their inability to generate sustainable income, which adds a significant value of the platform ecosystem. Fundamental design principles for Defi: - If the protocol does not work without a reward token, this is a Ponzi scheme The reward token should not be necessary for the functioning of the protocol. This means that the protocol is not a business that brings income. - Joseph Delaung* (@josephdelong) May 23, 2022 In an attempt to attract users, high profitability was proposed at an unstable rate, and the influx of funds was insufficient to compensate for payments and provide the basic value for their own token platform. In fact, this means that there was no real value of the token, which was used to pay high profitability offered to users. When users began to understand that their assets did not actually bring the promised profitability, they removed their liquidity and sold reward tokens. This, in turn, caused a decrease in the price of tokens, as well as the fall of the total blocked value (TVL), which further enhanced the panic among the users of the protocol, which also deduced their liquid means and fixed the cost of all the rewards received. Tokenomics or ponzinomics? The second drawback, marked by many experts, lies in the poorly thought -out tokenomic structure of many Defi protocols, which often have an extremely high inflation rate, which was used to attract liquidity.
high rewards is good, but if the cost of a token paid as a reward does not correspond to reality, then users, in fact, risk greatly, refusing to control their means practically without remuneration. This is largely due to the problem of obtaining Defi income and the inability to create a stable treasury. High inflation increases the supply of tokens, and if the cost of tokens is not maintained, liquidity leaves the ecosystem.
Users with an excess credit shoulder Excessive use of the credit shoulder is another endemic problem of Defi, and this drawback became extremely clear when Celsius, 3ac and other platforms investing in Defi began to collapse last month. Users who bet on these inflationary tokens in order to increase their positions were eliminated when prices fell due to sales on the market. This led to a deadly spiral for the protocol. @Wonderland_fi is one of these protocols where users used $ Time to borrow $ MIM and were eliminated. - Magik Invest ✨ (@magikinvestxyz) June 28, 2022 These liquidations only aggravated the descending trend, which many tokens had already experienced by launching the death spi, which spread to the CEFI and Defi platforms and several centralized crypto -rhizas. In this sense, the fault for excessive repredation without a reliable action plan in the event of a market fall falls on users. Although during the heyday of the bull market it may not be easy to think about such things, the trader should always remember this, since the cryptocurrency ecosystem is well known for its volatility.