I’ve seen a few articles in the last few days about the death and decay of decentralized finance (DeFi).
The trigger was the recent problems in DeFi caused by an exploit and crypto founder who is a terrible risk manager. In short: The founder of a well-known automated market maker (AMM), Curve Finance, lent almost half of the protocol’s CRV tokens to some DeFi lenders and was almost liquidated after an unexpected but somewhat predictable DeFi exploit caused the price of CRV depreciated.
Adam Blumberg is a certified financial planner and the co-founder and chief educator of Interaxis, a company that seeks to bridge the education gap between digital assets and traditional finance. He is a writer for CoinDesk’s Crypto for Advisors newsletter.
The first article was a great op-ed in CoinDesk written by Daniel Kuhn who said DeFi is “dead inside.” The second was a report from JPMorgan that argued that the entire sector was in “shrinkage or standstill mode.” However, these commentators couldn’t be further from the truth.
I don’t think DeFi is dead nor is it shrinking.
The idea of what DeFi was in the summer of 2020 is certainly and thankfully dead. It was a time of too much bribery, liquidity and yield talk. “Yield farming,” the fuel fueling the DeFi Summer fire, eventually calmed down and some decentralized platforms emerged as market leaders – many of them using professional “white glove” services to expand.
But the sector is not perfect. As Daniel noted, we also have far too much power in the hands of too few people. Sounds too familiar.
The difference between this technology and the technology of the past is that DeFi has become extremely financialized. It’s not ideal when a bunch of programmers start playing financiers.
But we must remember that we are still experimenting with the technology. We’re not sure how to use it. Mistakes are made.
What we have achieved in recent years is building robust systems that do not operate within the confines of traditional companies, banking channels or even geographical boundaries. The system was so secure that financial and corporate giants such as Mastercard, Visa, Coca Cola, Anheuser Busch, Nike, Starbucks, BNY Mellon, BlackRock and Fidelity invested money and internal resources into using the technology to increase efficiency.
These early experiments and company explorations show that DeFi can be professionalized and that its market growth does not always have to be driven by FOMO.
But while the dream of many is for complete decentralization of all financial systems, the reality will never match reality… at least not in our lifetime. The hardest thing to figure out is the balance of power between self-executing code and the people who create it.
Curve is just one example: you can’t take the person out of the person. But that’s okay.
With DAO Summer 2021 we have taken the path of decentralization even further. It became commonplace that anyone could join a decentralized autonomous organization via a Discord link, work for recently minted tokens, and get a say in the organization. Until, of course, the founders and investors decide to vote. Then we’re back to the corporate hierarchy.
This isn’t meant to be negative, but rather to say that it works, even if it doesn’t always seem that way. The fact is that DeFi will continue to be challenging. It’s getting even harder as DeFi continues to grow and clash with the real world and people who weren’t motivated enough to go down the crypto rabbit hole.
On one side of the crypto divide, we have those who want to maintain the traditional economic, financial and corporate system in which the Federal Reserve decides the money supply, the banks control the money, and the government tells us what we can and do what not to invest. In this system, the big publicly traded companies have control over our data and there’s not much we can do about it.
On the other side are the Degens, traders, builders and protocol developers who vote on everything based on the number of tokens and want to rule the world with money earned through computer codes.
In reality, we’ll probably end up somewhere in between.
There are still trillions of dollars of real estate, private and public companies, and debt securities all that need to be accounted for, traded, and mortgaged. These don’t go into the chain overnight. But the world is getting there.
And as we see more assets tokenized on-chain, DeFi will be waiting to provide credit, liquidity, and transparency. It’s worth noting that Curve CEO Michael Egorov borrowed in line with the system and the world was able to know about his potentially toxic debt because it was all on-chain. Many people even called him out. Where else in finance would such dangers be publicly known?
The successful growth of the DeFi ecosystem and technology has swung the pendulum and shifted the middle. Since DeFi offers transparency, efficiency, disintermediation and self-custody, it is possible that this will become the norm throughout the financial system. Otherwise, banks will be displaced by innovations in lending, borrowing and insurance that give more people more opportunities to participate.
The experiments are not perfect, but that is why they are experiments. While the Curve situation is worrying, the move towards decentralization means we simply have to let the market work. Allow the protocols, teams and systems to make the necessary changes.
DeFi is neither dead nor dying at all. In fact, it’s only just coming to light.
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