Cardano (ADA) boss predicts DeFi bubble will burst, how likely is that to happen?

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Cardano founder Charles Hoskinson talks DeFi in his latest interview. Rather than beat the drum of it democratizing finance, he called it a bubble that’s ripe for popping.

But what’s his reasoning for saying this, and what does he think will take its place?

Gensler says big changes are coming

Decentralized finance, or DeFi, is a general term that refers to financial products and services accessible by anyone. More so, it’s a system of financial products written on blockchains enabling buyers, sellers, lenders, and borrowers to interact.

It differs from traditional finance, where middlemen, like banks or brokerages, act as gatekeepers. And participating requires providing government-issued ids, such as social security or passport details.

Since summer 2020, the volume of DeFi tokens and money locked in DeFi has been growing exponentially. Ethereum is the biggest player of them all. But rising stars such as Binance Smart Chain, and newer players of the likes of Solana and Terra, are eating away at Ethereum’s market share.

An important consideration is that regulatory oversight is minimal. However, that may not be for long as SEC Chair Gary Gensler said big changes are coming.

In particular, Gensler said many projects that label themselves as decentralized finance are nothing of the sort. And with “centralized” characteristics, this puts them squarely in the sights of the U.S securities regulator.

Is DeFi going to crash and burn?

Sharing his observations, Hoskinson said he thinks DeFi is in a bubble. Adding that, it’s no different from what was seen with the ICO mania of 2017. Expanding further, he said being in a bubble isn’t necessarily detrimental.

“But just because it’s in a bubble doesn’t necessarily mean it’s in a bad situation. It just means that people recognize there’s value, but the market’s having a very hard time pricing that value.”

In backing up this view, he talked about the proliferation of projects, with small teams and low liquidity, being worth a billion dollars. Saying there’s something fundamentally wrong with this. To him, that’s a signal of the DeFi industry in regression.

Hoskinson also referred to Gensler’s recent comments, in which he said the SEC is looking at ways to bring regulation to the space. How that turns out is anyone’s guess. But the big fear is that the SEC will hamstring the industry, perhaps by forcing projects to track users and requiring identification to participate.

As such, it may well be the case that DeFi, as we know it, is done for. But with that, something else will take its place. And this next generation of DeFi, as Hoskinson put it, is up for grabs.