- DeFi craze will echo the ICO craze of 2017
- ‘Flipping’ DeFi tokens will be a new way of multiplying profits quickly
- COMP performance shows how the new model could work
The DeFi cryptocurrency craze has already been compared to the 2017 ICO craze, and not without reason – COMP token, a governance token freely distributed to users of the Compound lending platform, shot from $0 to $372 in the space of a week on the back of nothing but FOMO and a Coinbase listing announcement. DeFi is to 2020 what blockchain technology was to 2017 – just adding ‘blockchain’ to the name of a company was enough to net you millions in funds three years ago, and ICOs look to be passing the baton to ‘DeFi’ this time round. But what will this mean in practice, and how will the 2017 ICO craze be different from the DeFi craze of 2020?
Flipping ICOs Mark II
When ICOs first started turning multiple profits in 2017, “flipping ICOs” became the new craze. Any old charlatan with a website template and a glossary of blockchain terminology would announce an ICO for their world-changing project, alongside a target amount to raise, often in the tens of millions. Come ICO time and would-be buyers queued up like bargain hunters outside Target on Black Friday hoping to be among the lucky few to get in and grab their intended share when the minute struck.
The lucky ones would then hold their tokens for weeks and pray for a big exchange launch, knowing that they could make upwards of 10x on the ICO price as hype and FOMO encouraged buyers to pick up the tokens on the exchange. The price would often pump once the token listed, ICO holders (and often the project team) would sell for huge profits, and the token would dump, creating a generation of disenchanted and bewildered bagholders in the process.
DeFi Tokens the New ICOs
It is tempting to think that things will be different this time around with DeFi, but the psychology remains the same – people want to get in early, get tokens for cheap, sell high, and get out. What will be different, at least initially, is that the rush won’t be with the ICOs themselves, as DeFi projects won’t start out demanding millions to get set up. Some will get the hype train started early and seek ICO investment, but the real value will be in the tokens – especially if they are handed out for free.
As we saw with COMP, DeFi projects will come up with a variety of ways to distribute their tokens, with most opting for a reward model – users get rewarded in tokens for locking their funds into the platform. This has the dual benefits of attracting money into the DeFi platform and skirting the securities laws that have troubled so many ICOs since 2017.
The projects that are the most hyped up will see the biggest influx of cash locked up within them and will rocket up the DeFi charts, as COMP did. This hype will lead to FOMO with regard to the token price, where the other benefit of staggered distribution comes into play – the low circulating supply can’t meet initial demand. High demand plus low circulating supply equals price pump, which in turn equals FOMO, a blow off top as whales sell, and a dump. Early investors get out with their profits in the multiples and the coin crashes back to its fair value.
The Game is Rigged Once Again
Once again, the system is geared for whales and those on the inside to benefit from the process, with the end result being that those on the outside or with less knowledge or experience end up holding worthless tokens. Plenty of new DeFi projects will be just as fraudulent as many ICOs were in 2017, with the operators taking money and selling out once again, with the loss picked up by the investors.
Plus ça change.