The threats to DeFi’s sustainability — and how to fix them

In the space of 12 months, DeFi has become a $15 billion industry — spawning governance tokens that are now worth even more than Bitcoin.

But the rapid explosion of protocols has brought considerable growing pains… and concerns that the sector is not on a sustainable footing. When interest rates in conventional savings accounts stand at a fraction of a percent, while yield farming generates triple-digit returns, it’s inevitable that questions will emerge about whether this is a bubble that’s fit to burst.

As Ethereum co-founder Vitalik Buterin recently pointed out on a podcast with Ryan Sean Adams, such sky-high interest rates are “just a temporary promotion that was created by printing a bunch of compound tokens, and you just can’t keep printing compound tokens forver.”

SEBA, a regulated crypto bank in Switzerland, hit the nail on the head in September when it released a report that asks this: “What happens when the music stops?”

Its analysts warned that the current yield farming trend in DeFi is not sustainable — and went on to predict that only a small handful of protocols would survive in the long-term. Indeed, Yearn.finance has already embarked on a plethora of mergers in recent weeks designed to bolster development resources and expand its liquidity pool.

Although SEBA went to great lengths to stress that not all yield farming lacks merit, the company added: “Yield farmers made money by hopping from one protocol to another. As long as there are buyers for new protocol tokens, yield farmers can continue jumping among protocols. When buyers stop accepting the other side of the trade, this deranged activity will be arrested. Clearly, this trend is not sustainable.”

It pointed to SushiSwap, a fork of Uniswap, as an example. Following its launch, a myriad of other food-themed forks emerged. “When markets took a bad turn, all except SUSHI corrected by more than 99% and became almost worthless,” SEBA’s analysts wrote.

The bank ultimately…

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