I’ve seen quite a few articles about the death and decay of decentralized finance (DeFi) over the past few days.
The catalyst was the recent troubles 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 took the price of CRV devalued.
Adam Blumberg is a certified financial planner and co-founder and chief educator at Interaxis, a company trying to bridge the education gap between digital assets and traditional finance. He is a contributor to CoinDesk’s Crypto for Advisors newsletter.
The first article was a great comment on CoinDesk written by Daniel Kuhn saying DeFi is “dead inside”. The second was a report from JPMorgan, which argued that the entire sector was in “shrink or stand still mode”. However, these commentators couldn’t be further from the truth.
I don’t think DeFi is dead nor is it shrinking.
The notion 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 for 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 have to keep in mind that we are still experimenting with the technology. We’re not sure how to use it. Mistakes are made.
What we have accomplished over the past few years is building robust systems that do not operate within the confines of traditional corporate, banking channels, or even geographic boundaries. The system was so secure that financial and corporate giants like Mastercard, Visa, Coca Cola, Anheuser Busch, Nike, Starbucks, BNY Mellon, BlackRock and Fidelity are investing money and internal resources into using the technology to increase efficiency.
The story goes on
DeFi will continue to be a challenge. As DeFi continues to grow, things will get even harder.
These early experiments and corporate 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 full decentralization of all financial systems, reality will never match reality… at least not in our lifetimes. The most difficult 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 people out of people. But that’s okay.
With DAO Summer 2021 we have gone even further down the path of decentralization. It became second nature 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 are back to the corporate hierarchy.
That’s not meant to be negative, but to say that it works, even if it doesn’t always seem like it. The fact is, DeFi will continue to be a challenge. It gets even harder as DeFi continues to grow, clashing with the real world and people who haven’t been motivated enough to venture down the crypto rabbit hole.
On one side of the crypto divide, we have those who want to keep the traditional economic, financial, and corporate system where the Federal Reserve decides the money supply, banks control money, and the government tells us what we can and can’t do what not to invest. In this system, the big public companies are in control of our data, and there’s not much we can do about it.
On the other hand are the Degens, i.e. traders, builders and protocol developers who want to vote on everything based on the number of tokens and rule the world with money made from computer codes.
In reality, we’ll probably end up somewhere in between.
There are still trillions of dollars in real estate, private and public companies, and debt securities, all of which need to be accounted for, traded, and mortgaged. These do not go into the chain overnight. But the world is on the way.
See also: Tokenize everything: Institutions bet on the future of crypto
And as we see more assets tagged 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 learn about his potentially toxic debt because everything was on the chain. Many people even called him to speak. Where else in finance would such dangers be public knowledge?
The successful growth of the DeFi ecosystem and technology has swung the pendulum and shifted the middle. As DeFi offers transparency, efficiency, disintermediation and self-custodial, it is possible that this will become the norm across the financial system. Otherwise, banks will be crowded out by innovations in lending, borrowing, and insurance that offer more opportunities for more people 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. Let the protocols, teams and systems make the necessary changes.
DeFi is not dead, nor is it even dying. In fact, it’s only just beginning to emerge.
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