Pros and Cons of Wrapped Tokens and Defi, with the Eyes of a Spectator

Wrapped tokens -- as in wrapped Hive and now wrapped LEO -- became a buzz term in our ecosystem with the creation of wHive by @fbslo on the Etherium network about a week ago, quickly after @theycallmedan threw the idea publicly.

^Source

A bold move, followed by another step by LEO, which will also incentivize liquidity providers on the newly announced wLEO.

But why do we need wrapped tokens on another blockchain like Etherium people have asked, especially since our blockchain is faster and feeless.

That was a justified question, one with a good answer as well. Etherium is by far the blockchain with the most dApps and with the most money thrown around, often unjustified. Remember ICO craze of 2017? That was on Etherium as well, as it is the DeFi craze nowadays.

Through wrapped tokens Hive and LEO hope to tap into this enormous ecosystem, both in terms of finances and dApps. At the same time, some eyeballs may become interested in Hive at a deeper level, and since Etherium fees went through the roof, some may discover we have free and quick transactions.

But wouldn't wrapped tokens incentivize big shareholders of Hive / LEO to get out of our ecosystem and move to Etherium?

I don't think so. Some tokens will migrate to Etherium wrapped tokens, but once they do, they won't participate in governance and decisions on DHF or reward pool distribution, because they won't be staked anymore. I believe the major Hive stakeholders will continue to want to have a say in the decisions around here. And that won't happen from Etherium.

Additionally, Hive/LEO holders don't have to dump them on the market to buy something else they are interested in. They can put them as collateral and borrow the other token they want (for example to participate in DeFi yield farming, which appears to be a trending thing -- and risky, in my opinion). As long as they earn more than they pay and potentially more than Hive's inflation, that is a good option for some investors for having their tokens liquid.

What's the benefit to smaller stakeholders of Hive and especially LEO, if bigger accounts move part of their stake to wrapped tokens? Their influence will grow in all all aspects where stake matters, including author and curation rewards, as explained very well by @taskmaster4450 in an earlier post:
https://peakd.com/hive-181335/@taskmaster4450/krgoqtnj

Ok, those were largely pros, in my opinion.

But there are cons too.

I won't list fees at the top, but greater risk instead.

So, from a spectator standpoint and someone not involved in Defi at all, here's what I identify as the most important risk factor.

DeFi seems to have started to overheat, which means at some point, sooner rather than later, the whole system will need a different perspective, to say the least, if it were to continue. That might mean a few major crashes before it happens. And if your funds are trapped in the unlucky losers... tough luck.

Yes, I know, most of us in the crypto world are often risk takers, and used to wild swings. That's why, if there wouldn't have been for the second con, I would have tested the DeFi world myself a while ago with at most a few hundred bucks.

But the fees on Etherium and especially the smart contracts, from what I read, are no joke. And that is especially important if you don't want to play with large amounts of coins, because maybe you cannot afford it. It's one thing for the fees to be 0.3% of your amount, another to be 20-30%. This is a game for deeper pockets than mine at least.