Decentralized finance (DeFi) is in the doldrums. The hype of the past couple of years has waned, and several protocols have failed to gain traction.
Furthermore, many of the hundreds of newly launched protocols have simply collapsed. According to researchers, there are three main reasons why this has happened.
On Jan. 10, DeFi analyst ‘CyrilXBT’ suggested three critical flaws weighed down DeFi protocols this cycle.
Risk, Revenue, and Leverage
“Most Defi protocols have poor risk management, insufficient revenue, and the overuse of leverage,” he stated.
Systemic risk mitigation is a key factor for the success of a DeFi platform. 2022 saw countless hacks, exploits, cross-chain bridge attacks, compromised smart contracts, and rug pulls.
According to a recent report, crypto and DeFi losses hit $3.9 billion last year. Poor risk management is a fast track to failure for any DeFi protocol.
The ability to generate revenue and remain profitable is another critical factor. The researcher noted:
“One of the most frequently cited reasons for DeFi protocols struggling is their inability to generate sustainable income that adds meaningful value to the platform’s ecosystem.”
The third critical factor is over-exposure to leverage. Protocols that had tokens that could be used as an asset to borrow loans got trapped by users taking over-leveraged positions
Leverage has also been the cause of some of last year’s major meltdowns, such as Celsius and Three Arrows Capital (3AC).
DeFi will come back stronger, but only the fittest protocols without exposure to these three critical flaws are likely to survive.
Lido Becomes New DeFi King
Curve Finance is the third largest DeFi protocol with $4.3 billion in collateral locked. Furthermore, the total for the entire ecosystem is $47.6 billion, a decline of 74% over the past 12 months.
BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.