Without a doubt, 2020 will be remembered as one of the most important years for the crypto community. Now that, in the middle of a new bullish rally for Bitcoin, the crypto world is starting to vibrate with the birth of dozens of new decentralized finance projects (DeFi). However, in the face of warnings from several analysts about the exaggerated excitement over DeFi, today we ask ourselves: What is the difference between Initial Coin Offerings (ICO) and DeFi?
ABC Crypto, Lesson 23: ICO Why should we care about them?
A bad memory: The ICOs in 2017
The ICOs are one of the most interesting mechanisms in the crypto market. They consist of a process by which new companies or Blockchain projects try to obtain financial resources from the market. Emulating the IPO process of traditional companies, the Initial Public Offerings.
But, unlike the IPO, in the ICOs the new projects do not issue shares that are bought by investors. On the contrary, they allow the purchase of a token within their Blockchain, which, if the project is successful, will lead to profits in the millions. But if the project fails, the value of the token will be zero.
Because there is no regulatory institution around the ICOs, being a decentralized process, they are high-risk investments. Although large companies such as Binance, and innovative projects such as Ethereum, have emerged from the ICOs. They have also allowed thousands of people to be cheated out of millions of dollars. After investing in projects with no future that simply vanished.
This risk reached its highest level so far in 2017. When in the middle of the great Bitcoin rally, the markets experienced a period of exaggerated optimism. Leading thousands of people to invest in ICOs with little or no research behind their decisions. The end of the ICO speculation bubble became one of the saddest episodes in the history of the Blockchain.
A new challenge: The DeFi
Therefore, it makes perfect sense that the excitement generated by DeFi projects should generate concern in the crypto market. In the face of the possibility that the history of the ICOs will be repeated. This time in the form of failed decentralized finance projects.
Thus, DeFi projects, like ICOs, are mechanisms for decentralized financing through Blockchain technology. Only in the case of the DeFi, instead of being an exit to the „stock market“ what is tried to emulate. The objective is to grant loans as a traditional bank would do, but in a decentralized way through smart contracts. This is the central difference between ICOs and DeFi.
In other words, without the need for the intervention of a decision-making body, people can deposit money in a DeFi project, which will be lent to another person, who will use it and return it with interest, with this interest being the first depositor’s profit.
In this way, the intention is to include in the financial system people who otherwise would not have the opportunity to obtain a bank credit. Generating a boost to the economy, and exciting dozens of investors. Those who have launched to invest in the dozens of DeFi projects that have been born in the last weeks.