(Bloomberg) -- Scams and get-rich-fast schemes in decentralized finance, or DeFi, are giving the crypto industry a black eye, according to Mike Novogratz, chief executive officer of Galaxy Investment Partners LLC.

“The same way a lot of the ICOs gave crypto a bad name, there are plenty of these coins that became Ponzi-like,” Novogratz said in an interview. “It’s kind of gamifying money. There are still lessons we are going to get out of that, but it’s not great for the ecosystem.”

Back in 2017 and 2018, investors bought billions worth of tokens from startups through initial coin offerings, with the majority turning out to be scams. Today, DeFi tokens are enticing investors with triple-digit returns via schemes like yield harvesting in a world of zero interest rates.

“It was a frenzy, people got a little bit silly,” Novogratz said. But he says the mania is calming down after a recent decline in many DeFi tokens’ prices.

DeFi apps let people borrow and lend money from each other directly, without using intermediaries like banks. They’re also targeting functions provided by exchanges and insurance companies. In a few years, DeFi apps will eat into many intermediaries’ businesses, the former hedge fund manager said.

Novogratz said that while banks are scared of what decentralized finance might do to their businesses, he’s sure that DeFi “is not a fraud, not something that’s going to come and go.”

So Galaxy is becoming a minority shareholder in ParaFi Capital, which makes DeFi investments. Other ParaFi investors include Bain Capital Venture and Henry Kravis, co-founder of private-equity powerhouse KKR & Co.

“It’s probably 5% of our capital, roughly, so that’s not giant bet,” Novogratz said, of its entire investment in DeFi.

As of Aug. 31, ParaFi had more than $100 million in assets under management. ParaFi and Galaxy Digital expect to identify opportunities to jointly co-invest.

“We want to stay close to the cutting edge,” Novogratz said. “My instinct is, this is a really important part of the ecosystem.”

ParaFi was founded by Ben Forman, previously an executive at private equity firms KKR and TPG. ParaFi began investing in DeFi in 2018, and its investments include apps like Compound, Aave and Uniswap. Venture capitalist Andreessen Horowitz delegated its crypto fund’s Compound governance rights to the firm.

Galaxy formed an internal team focused on the DeFi sector about three months ago, and has already invested in half a dozen projects, including 1inch.exchange -- helping people find the best token prices on decentralized exchanges, Novogratz said.

©2020 Bloomberg L.P.