The Cryptocurrency and Blockchain Industry has witnessed many experiments over the past years, most of which were successful but some failed.
One crypto experiment that made the difference is Ethereum and it eventually paved the way for Initial Coin Offerings (ICOs), Alternative Coins, Smart Contracts, Decentralized Applications (DApps) and subsequently Decentralized Finance (DeFi). We will go into full details on all of these as we continue.
Crypto experiments over the years
The first crypto experiment was carried out in 2009 by Satoshi Nakamoto when he created Bitcoin. Although Bitcoin wasn’t a huge success in its first years, but it later turned out to be the most successful crypto experiment in history.
The next major crypto experiment was the creation of Ethereum in 2015 by Vitalik Buterin. Ethereum paved the way for a revolution in the Blockchain Industry that ushered in new innovative ideas or experiments as we may call them. Let’s take a look at some of them.
Ethereum inspired crypto experiments:
Exp. One: Initial Coin Offering
The first cryptocurrency Bitcoin did not organize a crowd funding event for its investors. The only way to invest or get Bitcoin then was through Bitcoin mining.
In 2015, Ethereum introduced the first crypto crowd funding mechanism called Initial Coin Offering (ICO). This marked the creation of a new crypto experiment that enjoyed huge successes in 2016 and 2017.
The ICO idea was great but a major problem was; people were only investing in words and graphical illustrations on paper (white paper) with no viable product (DApp) to show. The ICO hype saw many crypto projects rake in over $4 billion as at November 2017 with no viable product to show for it and eventually a majority of these crypto projects disappeared or exit scammed.
Initial Coin Offerings (ICOs) were mainly a money grab opportunity for many of these crypto projects. People lost huge sums of money to these scam ICOs, which as a result killed the hype and made investing in ICOs unattractive. This marked the failure of another promising crypto experiment.
Crypto Lending – Bitconnect & PlusToken
The ICO experiment gave birth to another crypto experiment in 2016 spearheaded by Bitconnect crypto project. With the ICO boom, crypto projects were experimenting new ways of attracting investors one of which was through cryptocurrency lending.
Bitconnect introduced the concept of cryptocurrency lending in 2016. Where investors buy their native token during ICO or after the ICO on crypto exchanges with Bitcoin. After which you choose an investment package to invest in by lending your tokens to the company in order to get paid a fixed daily interest for a period of time.
PlusToken crypto project’s idea was based on a cryptocurrency wallet that pays daily interests to its wallet users for holding PlusToken. They claimed the daily interest would be generated from exchange profit, mining income, and referral benefits.
PlusToken raked in over $3 billion in investment from its investors at its peak. Although they paid out the daily interests to early investors but later exit scammed with over $2 billion.
PlusToken pulled the biggest scam in the crypto industry and they keep dumping the crypto market anytime they want to liquidate their loot till date.
Major limitation of the crypto lending model
The major problem with the crypto lending model was it operated the ponzi scheme structure where new investors capital were used to pay the old investors and for the cycle to continue new investors must always come in.
Crypto lending bull run
This period witnessed a massive boom in Ethereum price and also the cryptocurrency lending industry like we are witnessing today with DeFi.
During this period, an average of two new crypto lending projects were being launched daily with enticing daily interest rates to lure investors. A majority of these crypto lending projects were outright scams. These includes Bitclub, Onecoin, GoldReward, Davor, MMM, GetHelpWorldwide, the list goes on and on…
Exp. Two: Initial Exchange Offering
Initial Exchange Offering is quite similar to an ICO, but in this case the crowd funding event is hosted on a cryptocurrency exchange. Binance were the first movers at organizing a crowd funding event on a crypto exchange. Immediately other crypto exchanges copied the idea and IEO became the new hype for crypto projects and investors.
The four major problems with the IEO experiment were:
- Crypto projects were mainly leveraging on the popularity of well established crypto exchanges to get investors.
- People were only investing with the hope to sell higher than where they bought in during the IEO. Due to past performances of other IEOs.
- Like the ICO model there were no guarantees if prices would go higher than IEO price.
- It was another money grab opportunity for some crypto projects with no viable product.
Exp. Three: Deflationary Tokens
Remember the law of demand and supply? Here’s the deal, what if you can reduce supply artificially which would bring about scarcity and may correlate in increasing demand. This was essentially the idea behind deflationary tokens.
What are deflationary tokens?
Deflationary tokens are crypto assets that reduces in circulating and total supply with each transaction based on a predetermined deflation or burn rate coded into the smart contract of the token. This was the new cryptocurrency social experiment, started by Bomb Token in May 2019.
In every bomb transaction 1% of the tokens involved in that transaction are lost forever. Other crypto projects came up with higher burn rates these includes Nuke with 2% burn rate, Void with 3% burn rate, Super Black Hole with a 20% burn rate but then Seppuku took the deflationary craze to a new level with an astonishing 90% burn rate lol.
The Deflationary token hype was huge that Crypto influencer John McAfee had to jump on it by backing Fuze deflationary token.
Here’s a new one: College kids and developers have designed a social experiment around a coin called Fuze https://t.co/dDO7NmE6xG. It’s hyper-deflationary – meaning 5% of each transaction is burned on the blockchain. The supply constantly decreases. Should be fascinating to watch
— John McAfee (@officialmcafee) July 10, 2019
At some point 1 Fuze exchanged for 2 Ethereum, and people were already predicting that deflationary tokens will swallow Bitcoin and Ethereum and other cryptocurrencies eventually…
Major limitations of the deflationary token model
- The tokens had no utility outside being deflationary.
- The scarcity was artificial and wasn’t backed by real demand.
- Deflationary token model was mainly a social experiment and not an investment class asset.
Exp. Four: Decentralized Finance
If you have noticed recently, a majority of top performing alternative coins are Decentralized Finance (DeFi) based. DeFi is the new trend in the crypto space, some crypto enthusiasts call 2020 the year of DeFi.
The astronomical growth of DeFi based tokens value and market capitalization has made some people within the crypto space including myself to believe DeFi is just another Crypto bubble. Although crypto venture investor and analyst Andrew Kang, believes the sentiment is incorrect.
See Also: Can Central Bank Digital Currency or Decentralize Finance (DeFi) be key for Cryptocurrency Adoption?
Kang made this known via a series of tweets on Twitter. Andrew Kang said “DeFi has been around for years, but has only recently received serious recognition in the crypto community But even with the buzz, the levels of understanding, usage, and capital allocation are all still low with high upside potential” .
Final Thoughts on DeFi
The potential of Decentralized Finance is huge but presently the sector looks like the wild west due to the high number of scams, hacks and exploitations happening wthin the space.
I think DeFi is another crypto experiment that may fail because:
- Some crypto projects are adding the name DeFi to their projects primarily to lure investors.
- The current hacks and exploitations being reported on DeFi protocols all points to DeFi still being experimental and not a viable financial solution.
- The number of tokens being listed on Uniswap daily with 95% of them being outright scams is reminiscent of the ICO, Bitconnect and deflationary tokens era.
- Governments and central banks will never allow finance to be decentralized that would mean them relinquishing total control of the financial sector.
- The DeFi lending model for instance is not sustainable for small DeFi protocols, as it mainly benefits the end users getting loans. The crypto projects makes little or no interest and for the project to be in business they must at least cover running costs. Soon many of these small DeFi projects with little funding will be out of business.
Note: The opinions shared in this article, are the opinions of the writer alone. You can send in your criticisms, suggestions and contributions by posting a comment below.