Navigating Trust in DeFi: The Impact of the Lindy Effect on Brand Confidence

2024-11-12, 07:30

[TL; DR]

The Lindy effect is a theory that helps crypto investors to uate the risk levels of different DeFi projects.

Upgradeable DeFi protocols can build brand level Lindy effect over a long period.

There is a danger that some investors may maintain cognitive bias confidence on upgradeable protocols that may develop vulnerabilities due to some updates.

Introduction

Smart investors often use different methods to assess short term and long-term potential of some investment instruments. This is particularly important when selecting crypto assets to invest in. Retail and institutional investors can use the Lindy effect to uate the potential of digital assets before investing in them. This analysis looks at the Lindy effect and its application when uating the potential of cryptocurrencies.

Paradox between the trustless nature of crypto: The importance of trust in DeFi brands

Usually, cryptocurrency users maintain their confidence in DeFi brands that they have used for long periods. Since there are many threats of malicious attacks they use the protocols that have proved to be secure and meet their needs for a long time. For instance, many crypto users invest in bitcoin because its blockchain has never been breached ever since its inception. In some cases investors’ confidence in certain DeFi protocols remains even after some upgrades. However, every upgrade leads to the resetting of the entire which may lead to vulnerabilities.

Understanding the Lindy Effect

The Lindy effect, also called the Lindy law, is a theory that states that the lifespan of a non-perishable thing or cultural practice is positively correlated with its age. To illustrate, in real life people tend to trust technologies, ideas, or cultural phenomena that have existed for long periods. In other words, after a long time in existence technologies become more trustworthy than before since they would have been refined to overcome certain possible threats. Thus , the technologies that have endured many challenges in the past have higher chances of overcoming potential threats.

The Lindy effect is very practicable in the blockchain sector. It helps to explain blockchains, DeFi protocols and digital assets that have been in existence for a long period. Such resilience demonstrates their possible future longevity, viability as well as profitability. Cryptocurrencies that have been on the market for a long period such as bitcoin and ETH demonstrate that principle. Specifically, people view DeFi projects which have maintained high security, decentralization, immutability, scalability and community support for long periods as resilient and reliable. Such crypto brand trust is a reason why many people invest more in certain blockchain based projects than others.

The Lindy Effect in DeFi Protocols

The Lindy effect is very applicable in the DeFi sector where we find upgradeable and immutable protocols. This principle applies the most to immutable DeFi protocols which are non-perishable goods. In other words, immutable DeFi protocol cannot be upgraded. Therefore, they maintain their status within the blockchain sector. If such protocols have been secure, without exploits since their inception it is most likely that they may stay the same in the future

One DeFi protocol that has proved to be immutable is Uniswap v1, launched in November 2018 and v2, launched in 2020 , which have maintained their status since then. Since their launch they have not been upgraded through hard forks or similar means. The notable thing is that they have maintained their DeFi safety since their launch. Therefore, the users expect them to continue operating smoothly without developing vulnerabilities.

The Lindy effect also seems to apply strongly to bitcoin which was launched in 2009. As we know, bitcoin has been performing well for the past 15 years and is showing signs of sustained growth. This creates brand trust in the number one cryptocurrencies. This is the reason why many countries have introduced bitcoin derivatives such as BTC ETFs. Since it was the first cryptocurrency bitcoin has a reputable track record. It has overcome several obstacles including regulatory scrutiny from many countries.

Based on the Lindy effect bitcoin may remain one of the best investment assets if it is widely accepted as a medium of exchange and a decentralized store of wealth. Due to its secure network many retail and institutional investors are willing to invest in itt. Already, in 2021 El Salvador became the first country to adopt bitcoin as a legal tender. Most significantly, its limited supply enhances its value proposition.

The Challenge with Upgradeable Protocols

As said earlier, the Lindy effect applies perfectly to immutable protocols that have not been breached over the past years, say for ten years or thereabout. However, this is not the same with upgradeable protocols. Upgradeable DeFi protocols are the blockchains that can be upgraded from time to time. Oftentimes, the developers update them to add new features and fix security issues. Aave, Compound and Lido are examples of upgradeable DeFi protocols.

Unlike the immutable protocols that maintain the same state the upgradeable ones change every time a new upgrade is launched. This is because every time that a patch is added the protocol’s code changes. Based on the Lindy effect every time that an upgrade is launched a new entity emerges which becomes liable to risk uation. The fact that the latest upgrade may come with new vulnerabilities means that the users may need time to confirm its efficiency and security, among other key attributes.

The same principle applies to smart contracts that are built on upgradeable protocols. Similarly, the launch of a new upgrade on the underlying blockchain resets the Lindy effect for both protocols. This applies the same to modular protocols where immutable pieces of the stacks are swapped for new ones.

Brand-Level Lindy Effect in DeFi

Brand reputation in crypto depends on the popularity of the DeFi project from the time of its launch. As noted above, the protocol level Lindy effect resets every time there is an upgrade. However, the brand-level Lindy effect continues to grow despite the upgrade. In addition, trust in such DeFi protocols grows based on the reputation of the team, the project’s security record and the overall track record. Other factors that help to improve DeFi brands include community engagement, marketing effort and regular audits.

The Cognitive Bias of Overconfidence

At times the users overlook the DeFi safety of several protocols because they have been dealing with them for long periods. Even if such projects had recent DeFi protocol upgrades which might have changed their security state. The reason for the users to stick to such DeFi projects is their cognitive bias. The fact that such projects have been performing well for the past several years without bad incidents make them maintain their trust in them. Regardless, due to some upgrades once-trusted protocols may encounter unforeseen vulnerabilities despite the well-intentioned updates.

Notably, this trust is developed over many years. An example is that of the Euler which was hacked in March 2023 after it introduced an upgrade with a new feature aimed at improving its functionality. Sadly, that update became the enabler of the exploit.

How to apply the Lindy Effect when uating DeFi protocols and brands

The Lindy effect enlightens us about the need to assess the underlying elements, features and technologies of the blockchains whose products we aim to invest in. In fact, there is a need to carry out a thorough DeFi risk assessment of any project we intend to invest in. It is important to uate its governance structure, network security as well as consensus processes. Thus, it becomes essential to invest in DeFi brands that have track records of decentralization and security. Also, It becomes vital to put personal resources in projects that have been on the market for long periods.

The Lindy effect teaches investors the need to have a long-term perspective when investing in DeFi projects and assets. Thus, we should refrain from investing in crypto projects with the hope of generating quick profits based on speculative tendencies. It is also important to realize that there are many upgradeable protocols that accrue the Lindy effect. Thus, investors can invest in them.

Conclusion

The Lindy effect is a law that helps crypto investors to assess the worthiness of several DeFi projects before investing in them. It states that the life expectancy of a non-perishable thing is positively correlated to its age. In this context, some technologies such as blockchains may accrue the Lindy effect. Finally, investors should assess the security, decentralization and reliability of the digital projects they want to invest in.

Author:Mashell C., Gate.io Researcher

*This article represents only the views of the researcher and does not constitute any investment suggestions. All investments carry inherent risks; prudent decision-making is essential.

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