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Vitalik Buterin warns public about DeFi

Photo of: Nathan VDH
by Nathan VDH

The founder of the Ethereum network has taken to Twitter to offer a warning about the potential risks of using smart contracts in DeFi. The well-known figure in the cryptocurrency world has warned users to not risk their life savings in unproven DeFi projects.

The man behind the Ethereum protocol argued that many people do not realize the risks of smart contracts. We are still very much at the inception of a very powerful technology. There are still risks and vulnerabilities and the bullish attitude of the market is certainly scary.

Certain DeFi projects have certainly seemed ‘too good to be true’. The flavor of the week in that category has been YFI token whose value has more than doubled in the last few days to a value north of $30,000.

Assets such as YFI token are governance token in very limited supply whose value is growing incredibly due to high demand. As Buterin notes, the people involved in farming and providing their assets for incredible returns will potentially see returns settle to a more sustainable percentage in the near future and the people investing their savings in the governance tokens might be in for a rude awakening according to Buterin.

Buterin is not opposed to DeFi in general, in fact, he stated at the Ethereum Virtual Summit a few months ago that there was no inherent problem in properly run solid projects. He criticized centralized exchanges as well during this summit.

Defi tokens and inflation

Buterin also compared the coins received by farmers who leave their liquidities in DeFi apps to the irresponsible monetary policies of central banks who increase inflation. The process of yield farming, providing liquidity to be borrowed to earn coins as rewards, has led to an incredible boom in the DeFi system.

The number of coins which will have to be created to pay users for storing their liquidities on their services will quickly lower the general value of these coins. This is fine for the people who have only deposited their coins there as they will simply lose this impressive cash cow, but the investors in these coins might see them lose value very quickly.

As always, the most important advice is DYOR (do your own research). Certain projects are solid and, while they’re benefiting from the bull market right now, they will not lose their values once the growth becomes more quieter and sustainable.

This situation is also causing problems to Buterin himself as criticism has reemerged over his system’s scaling capacity. There is so much demand for complex smart contract executions that the Ethereum has not only been slowed down but the costs to do simple transactions has also skyrocketed, reaching in certain cases triple-figures.

With DEX like Uniswap driving the explosive growth in the domain, Ethereum transactions have rarely been so popular.