Comparing and Contrasting: DeFi vs ICOs

Decentralized Finance tokens have been leading this general crypto bull run in much the same way that ICOs were a focus of the 2016-2017 bull run. But is that where the analogy ends? Here’s a walkthrough of some similarities and differences.


  1. They reduce ETH circulating supply. Bullish for ETH in that both ICOs and Defi incentivize purchasing and locking up ETH and ETH tokens; reducing the circulating supply of crypto assets often supports price appreciation. ICOs generally accepted ETH as investment, gave investors a new token, and held a large percentage of the ETH in treasury. DeFi provides new minted tokens in exchange for staking ETH and ETH tokens.
  2. Started slowly with long-term VC money, accelerated with fast moving “retail” money. The ICO boom arguably began with VC and angel investor capital into the ethereum ICO. Technical innovation (ERC20s) and early investment successes then supported many follow-on ICO projects with investment by an increasingly retail community. The DeFi boom similarly began with long-term VC and angel investment into early projects. We now have a plethora of projects launching and attracting more “fast moving” capital.
  3. ICOs and Defi aim to decentralize existing business models, but largely built usage and communities via token speculation. Both ICOs and DeFi were largely centered around taking existing business models and decentralizing them, and bootstrapping early network effects with speculation on token price appreciation. ICOs that aimed to build a “decentralized version of X” attracted initial communities with the potential for financial gains from speculation on the token. DeFi provides decentralized versions of exchanges and lending platforms but has largely grown liquidity by with speculation on new tokens.
  4. Both ICOs and DeFi caused extremely high fees and congestion on the ethereum blockchain, incentivizing research and investment into scalability solutions. 2017 gave us a long slate of “ethereum killers”, many focused on scaleability. We also saw a focus on plasma chains, sidechains, and other layer 2 scaleability solutions. Scaleability research continues today (including with ETH 2.0 plans), and this focus may be accelerated with record high ethereum fees.
  5. Other protocols followed ethereum’s footsteps to support both ICOs and DeFi, but ethereum had the vast majority of both ICO and DeFi activity. For ICOs, the “composability” benefits of launching ERC20s included having a broad base of infrastructure support including wallet support and easy addition to exchanges. For DeFi, the composability benefits may go further, as DeFi protocols generally interact extensively, and cross-chain solutions remain nascent.


  1. ICOs sold new tokens in exchange for ETH. DeFi generally gives away new tokens for free in exchange for temporarily staking ETH (and other ethereum based assets). This may be a meaningful difference from a regulatory perspective as most ICOs were security sales, whereas DeFi tokens are generally provided in exchange for “work”, which may allow some to be exempt from security regulations as non-securities.This may also be less bullish for ETH than ICOs, since the same ETH is quickly recycled between projects to farm new tokens by the same set of investors.
  2. Unlike with ICOs, DeFi has a relatively modest set of use cases that are naturally “crypto native.” In ICOs, the target user of the product was often entirely distinct from the natural investor base in the token (e.g. a cosmetics ICO that sells cosmetics products to women in South Korea but raises money from ETH holders.) DeFi in contrast is providing crypto trading and lending services and distributing tokens to that same set of target customers. Enabling investors to instantly be users allows for faster growth in communities.
  3. While much of DeFi activity may be “circular” that exists because of temporary token incentives, that activity is still “real” and provides immediate value in the form of liquidity to crypto traders. In contrast, most ICO projects never launched a usable product.

What similarities and differences have I overlooked?

About Ari Paul

Ari Paul is co-founder and CIO of BlockTower Capital. He was previously a portfolio manager for the University of Chicago's $8 billion endowment, and a derivatives market maker and proprietary trader for Susquehanna International Group (SIG). Ari earned a BA in political science from the University of Pennsylvania, and an MBA from the University of Chicago with concentrations in economics, entrepreneurship, strategic management, and econometrics & statistics. Ari is a CFA charterholder.
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11 Responses to Comparing and Contrasting: DeFi vs ICOs

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