The decentralized finance (DeFi) craze is drawing interest and capital from all corners of the crypto industry. As of recent, even Arthur Hayes, the CEO of BitMEX who adamantly calls Ethereum a “s**tcoin,” has forayed into yield farming.
Hayes recently released an extensive blog post to BitMEX’s company blog entitled “Dreams of a Peasant” outlining his thoughts on the ongoing DeFi craze. Along with noting that it could drive large amounts of capital into Bitcoin and crypto, he also remarked that there are clear risks in using these decentralized finance protocols.
Dreams of a Peasant – an essay on #DeFi and the crypto fixed income markets. https://t.co/vgK2YSUqix
— Arthur Hayes (@CryptoHayes) August 27, 2020
The risks in Ethereum’s DeFi meta as outlined by Arthur Hayes, BitMEX CEO
Over the past few months, there have been extraordinary opportunities to obtain returns on one’s investment in DeFi. As much as Bitconnect this may sound, there were and still are legitimate opportunities yielding hundreds of percent, maybe thousands of percent, per year.
These yields do not come without risk, though.
Hayes outlined four key risks to DeFi “yield farming,” specifically citing what he calls “DeFi proto-banks” (a term he used to describe lending projects like Aave), in the aforementioned blog post. They are as follows:
- If you buy a DeFi token that is supposed to yield dividends from fees captured by the protocol and the token declines, you may be at a loss despite the dividends.
- The loan book “takes impairment,” meaning loans are not liquidated correctly due to liquidity, thus leaving depositors at a loss.
- There could be defaults if undercollateralized loans are introduced and borrowers don’t have the ability to pay back loans. Undercollateralized loans are something that Aave is testing out right now.
- A crypto hack takes place. “That is the result of an intentional or unintentional bug in the smart contract code that syphons assets out of the project, or they become inaccessible.”
The future of this space
Although he does see these risks in the cornerstones of the industry, these DeFi proto-banks, this nascent space has room to grow according to Hayes.
“When faced with severe income inequality, and free money (for the fortunate), financial speculation will surge. Would you rather work for 30 years for stagnant to negative real income gains in service to a mega-corporation, or would you rather come play in the intellectual casinos that are the financial markets?”
He added that in a world where ” greater than 50% of the population is on some sort of basic income,” trading these “worthless memes under the guise of innovative technology ceases to be so daft.”
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