The crypto market has faced lots of problems this year. Many funds and projects collapsed, sparking a domino effect that affected all others operating in this space. The dust has not settled as yet. Experts have been trying to understand what led to this crash. They cite ineffective risk management and systemic risks faced by decentralized finance.
The experts cite many reasons that led to DeFi crash. They also suggest solutions that can help the sector return to a healthy condition.
A prominent reason DeFi protocols have struggled is because they are unable to generate regular income that increases the platform’s value. A protocol not delivering the token reward becomes a Ponzi scheme. The protocol is not a business to generate revenue.
High yields at unsustainable rates have been offered by the protocols in their goal to attract more users. They have these goals but they do not have sufficient revenue to pay on time and ensure a strong value for their native token.
Poor designing of the tokenomic system is the second reason cited by multiple experts. It leads to high inflation that has been used to attract liquidity. The projects built on unsustainable Ponzi ideas try to take advantage of the inflationary tokens. While high reward looks attractive, if the reward token itself does not have a good value, the recipients are losing control over their funds and not receiving any benefit.
The third reason is the leverage overuse. This problem became clear when 3AC, Celsius and other DeFi platforms started unraveling last month. Users faced issues when they over-leveraged such inflationary tokens while the prices dropped due to market crash.
