DeFi vs. Bitcoin Debate Starts a New Round
In the industry where memes can dictate the value of a cryptoaset, wars of narratives are intensifying amid fresh capital entering the nascent crypto space.
While the never-ending Ethereum (ETH) vs. Bitcoin (BTC) debate is nothing new, the BTC camp is now opening a new front against the fast-growing decentralized finance (DeFi) industry, which is also dominated by Ethereum as a platform of choice.
This time, Jeff Dorman, the Chief Investment Officer of US-based investment management firm Arca, moved to defend DeFi from a famous BTC bull, Anthony ‘Pomp’ Pompliano of Morgan Creek Digital.
In a blog response to a recent Pompliano Substack post, Dorman took Pomp to task for warning investors against involvement in the DeFi sector.
Dorman described Pomp’s remarks on DeFi as “incorrect and misleading,” adding that Arca feels it’s “important to offer a counter-argument.”
Pompliano’s first point about DeFi is that it enjoys nowhere near the level of liquidity as the BTC market, something which makes DeFi tokens much more vulnerable to dramatic price swings downwards — as well as upwards — than bitcoin.
“To conflate investing in DeFi with using DeFi is misleading and inaccurate. There are less benefits when you choose to be a passive investor versus being an active participant in a decentralized network, and that can lead to lower return potential, but that doesn’t mean you have to be an active participant,” Dorman said.
Riskier / Not riskier
His second point, and the one with which Arca and Dorman most strongly disagree, is that the DeFi sector as a whole is much riskier than BTC because it’s more vulnerable to hacks.
“What I do know is that it will be hard for institutional investors to get comfortable allocating capital to areas of the market that are susceptible to theft or hacking. While an individual or company can be hacked in the Bitcoin world, there are no hacks of the actual blockchain,” Pompliano wrote.
Dorman accepts there have been hacks in DeFi, including yearn.finance’s very recent USD 11m breach. Nonetheless, he argues that “if you are a DeFi user, there are ways to protect your assets.”
This includes insurance platforms such as Nexus Mutual, which has been paying out claims related to the yearn.finance hack. It also includes the fact that decentralized exchanges such as Uniswap (UNI) are non-custodial, meaning that investors are unlikely to have their funds stolen.
Dorman makes the general point that investors can choose to invest in the tokens of DeFi platforms without exposing themselves to any risk that might come from directly using these platforms, and vice versa.
But with DeFi tokens such as AAVE and UNI entering the top 20 cryptos, and with DeFi’s total value locked in now topping a hefty USD 36 billion (per Defipulse.com) it seems like many investors have been doing both.
At the time of writing, Pompliano himself hasn’t replied to any of this. This may not be surprising, given that Arca’s post fell on the same day as the disclosure of Tesla’s USD 1.5bn investment in bitcoin, which sent BTC to fresh all-time highs of USD 48,025 (per Coingecko.com) today.
– Fed-Published DeFi Study By a European Professor Boosts Industry Morale
– ‘DeFi Will Eat JPMorgan’ But There Are Risks Before That Meal
– A Reddit Army Blurs The Line Between Crypto and Traditional Finance
– DeFi Trends to Watch Out For in 2021 According to ConsenSys and Kraken
– DeFi ‘Genie Is Out’ and Is Set For Growth in 2021
– Yield Farming-boosted DeFi Set For New Fields With Old Challenges in 2021
– If Traditional Finance Moves to CBDCs, 2 Scenarios Open for DeFi – INDX CEO
– Crypto Security in 2021: More Threats Against DeFi and Individual Users
– Top 4 Risks DeFi Investors Face
– ‘If DeFi Collapsed, Bitcoin Would Still Be Bitcoin’
DeFi Punches Above Its Weight As it Targets Bitcoin’s Thunder