Broken Arrow: The Dark Side of DeFi

The recent craze around DeFi is a perfect picture of the differences in the ideals of the crypto and blockchain communities, and the realties of technology and human nature.

What is DeFi, and why is it so popular?

Earlier this month, assets locked up in DeFi protocols nearly hit $12 Billion, an eye-watering amount even in an industry who’s catch phrase used to be “to the moon. ” In theory, DeFi just means decentralized finance, but as you’ll see in a moment, that’s very misleading.

To understand the current DeFi craze, we have to go back a few years to the early days of cryptocurrency. As Paul Amery writing in New Money Review explains, “DeFi arose from early frictions between cryptocurrencies and the traditional financial system.”

Early crypto investors faced serious regulatory issues when trying to exchange their tokens for fiat currency; the creative solution to this was stablecoins, tokens pegged to a fiat currency at a value of one-one. Of course, this didn't make regulatory issues go away, and early crypto adopters ended up with hordes of theoretically valuable, though practically useless, tokens they couldn’t trade for anything valuable.

In Amery’s words, “It was a short step from having billions sit around in fiat currency substitutes to seeking…