When the average person first hears about DeFi, it’s common for them to come across stories about epic collapses like Terra Luna’s wipeout of a $XXBn ecosystem, the $YYYM hack of Wormhole, or a pure and simple rug pull scam like Bit Connect.
Decentralized finance (DeFi) has shaken up a variety of industries from technology to business to finance. Foremost among these stands the financial industry due to the way it has revolutionized financial transactions. The growth of DeFi has facilitated faster transaction times, elimination of intermediaries, and empowerment among individuals by allowing them better control over their assets.
Despite the many positives, DeFi is still in the early stages of development. It’ll be up to leaders, users, and organizations to iron out the wrinkles before DeFi can reach its full potential. Any path to innovation is going to require a great deal of trial and error and, at this point, DeFi is no stranger to major failures.
DeFi is promising but failure is inevitable
DeFi is still a new concept under development so failures are going to happen. In fact, failure isn’t the opposite of success, it is a prerequisite for success. History has proven this to be true time and time again.
For example, Thomas Edison famously said that he found 10,000 ways to make a lightbulb that doesn’t work. Additionally, James Dyson, founder of the Dyson vacuum cleaner, created over 5,000 prototypes before he saw the success that led to selling his product in over 70 countries around the world.
What’s the moral of the story? Behind every successful innovation comes a long line of failures that took place first. Eventually, they failed forward and enjoyed incredible results.
DeFi projects that have had major hits
To date, a common problem for DeFi projects has been hacks. These lead to exposing flaws in the code of a project. Oftentimes, emerging projects will fork code that was exposed and essentially create their own copycat projects.
The volatility of cryptocurrency is something else that DeFi has had to face. A downturn in capitalization puts projects at risk and leaves investors scrambling to make fast decisions. Whatever the case may be, it’s up to developers to create more secure systems that offer greater walls of protection. Below are two examples of Defi projects that have experienced major setbacks.
DogeCoin was originally created as a joke that stemmed from a famous meme of a Shiba Inu dog that had trouble spelling. Its founders never expected that it would see much success and allowed it to be purchased for a fraction of a cent.
At one point, an exchange called Moolah was formed to make it easier to buy and sell Dogecoin. When the exchange went bankrupt in 2014, the worth of Doge took a plummet. The original creator of the exchange, Ryan Kennedy, was later arrested for money laundering. As a result, Dogecoin went from a market cap of $2 billion down to $250 million during its downward spiral.
Dogecoin picked up again in 2021 after Tesla founder, Elon Musk, began promoting it. Not long after, it reached its all time high of $90 billion.
Wonderland was created as a decentralized reserve currency protocol. It faced major scrutiny after a Twitter user outed one of its main executives for being involved in a major crypto scandal. The executive had remained anonymous for sometime under the pseudonym “Sifu.” Later, his name was revealed to be Michael Patryn, a man tied to numerous money scams, fraud, and even burglary. Patryn subsequently stepped down from his position at Wonderland, but this did not defer its community from heightened concern surrounding the protocol.
The price of Wonderland sits at $16.24 today.
Safemoon picked up steam on social media in 2021 due to its claim that it was a safe way for investors to get rich. It was particularly interesting to people because everytime someone sold the coin, 5% of the proceeds went back to coin holders while another 5% was destroyed. In theory, this approach was meant to drive up the price over time as the coin became scarcer.
The coin faced backlash; however, after some of its key employees jumped ship, lawsuits emerged, and famous supporters began claiming it was a “pump and dump” scheme. It never saw much success after this.
Ring Financial began as a unique project that aimed to aggregate DeFi protocols. It was inspired by a similar project, StrongBlock, that allows users to create blockchain nodes and rewards them for doing so.
The project grew quickly at first but saw its first attack in December 2021 Ultimately, the project’s contract was exploited by a hacker, and the project ended up facing quite a bit of doubt from investors.
The Ring Financial team was unable to keep up with the volume of negative feedback it was receiving and decided to end the project.
Terra (LUNA) coin
The Terra Luna crash is a more recent example of a setback within the DeFi community, although there has been much speculation related to what happened with the project. On May 7, there was $2 billion worth of UST, Terra’s algorithmic stablecoin, that was unstaked. This led to millions of dollars worth of the coin being sold.
This is where things get a little murky. Some say it was a result of a malicious attack while others believe the downfall was a result of recent volatility within the market. The value of Luna coins is now close to nothing, which was a major slap in the face for Luna holders and called into question the viability of algorithmic stablecoins.
Over $17 billion in crypto value was lost in the midst of the Luna crash. Some holders had most of their savings invested in the coin. Simply put, a lot of people lost a lot of money in the UST crash.
Like Thomas Edison before, the world of crypto is finding out many different ways to make a DeFi project that doesn’t work. Collectively, failures within the DeFi space have helped to map out what areas need improvement.
While some issues will be harder to fix than others, innovation can only occur after setbacks are addressed and corrected. After all, improvement does not occur from doing things the way they have always been done.
More often than not, the greatest comebacks are from those that learn from their mistakes and make sure they do not repeat them again. Both Ring Financial and the UST crash showed that better security protocols are paramount for the decentralized space. It might take developers some trial and error, but projects will see substantial, positive changes in the long run.