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The eyes of the world are on the trial of FTX founder and former crypto figurehead Sam Bankman-Fried, who has turned into a symbol of the worst excesses of the last crypto bubble. But the media circus surrounding the trial consists more of true crime series than legitimate commentary on decentralized finance.
It’s true that DeFi has been on a roller coaster ride over the past few years. The sector exploded onto the financial and technology scene in 2021 as groundbreaking new tools allowed people to put their money to work and earn returns in unprecedented ways by participating in networks like MakerDAO and Aave.
Despite its apparent suddenness, this breakthrough was a long time coming. For decades, if not centuries, traditional financial markets and instruments have squeezed investors in two important ways.
The first relates to access: Because traditional markets are overseen by centralized gatekeepers like banks and investment funds, they have historically excluded large swaths of the world’s population, particularly outside of the wealthy countries where most major institutions are located. The second limitation was technological. In the digital age, markets have remained largely analogue.
Defi introduced innovations that opened the door to financial products that were simply not possible before. This proved to be both a blessing and a curse: the combination of novelty and popularity led to a proliferation of Defi products – not all of which worked as advertised. Many projects promised investors far more than they could deliver. And as the FTX-Alameda saga shows, some fell into outright scams.
The huge increase in activity, meanwhile, put a lot of strain on Ethereum’s capacity, which enabled many of these early innovations with its smart contract functionality. Combine all of this with the macro-driven descent into a bear market in 2022, and it’s no surprise that Defi has suffered a decline. But I believe we are now on the cusp of a new era of growth and opportunity.
This time, however, there will be one key difference: much of the next phase of growth will occur on Solana – as we build the infrastructure that allows Defi projects to thrive.
I am confident that with the right tools, Solana can and will power the next version of decentralized finance: Defi 2.0. As an early participant in the ecosystem, I am familiar with the many strengths that make it the first choice for the next generation of Defi protocols.
Solana is one of the fastest and most environmentally friendly Layer 1 blockchains in the industry. In practice it processes around 5,000 transactions per second, but reached peak speeds of 65,000 in tests. This dwarfs Ethereum’s current speed of 15-25 TPS. This and the fact that Solana’s transaction costs are among the lowest in Web3 have made it the preferred home of some of the smartest and most innovative Web3 developers. In December, Vitalik Buterin noted in a tweet:
Some smart people tell me that there is a serious, smart developer community on Solana and that the chain has a bright future now that the terrible opportunistic money people have been washed out.
It’s hard for me to say from the outside, but I hope the community gets a fair chance to develop🦾🦾
— vitalik.eth (@VitalikButerin) December 29, 2022
Positive sentiment towards the network has grown throughout 2023, with strong performance reports and expressions of confidence from various quarters. There were three significant votes of confidence in September alone.
On September 1, MakerDAO, the creator of the popular stablecoin DAI, announced that it intended to use Solana’s codebase – rather than Ethereum’s – as the basis for its new chain. Rune Christensen, CEO of MakerDAO, said his decision was based on Solana’s efficiency, technical quality and available developer talent – and most importantly, its resilience. A few days later, Visa offered validation from the mainstream world when it announced that it would use USDC and Solana to increase its ability to transact in cryptocurrencies.
And in mid-September, former Goldman Sachs executive Raoul Paul called Solana “the best big story in the Defi space outside of Ethereum,” praising its speed as well as its extremely engaged developer community.
But while recommendations like these show that the whole world is recognizing Solana’s advantages – speed, energy efficiency and proven stability – there is still one ingredient needed to truly fuel the emergence of DeFi 2.0: a critical mass of high-quality tokens.
Token flow is the lifeblood of Defi. Well-known crypto assets would attract a new investor base, which in turn would create more liquidity. Greater liquidity would make Solana’s decentralized marketplaces more efficient and less prone to volatility, which in turn could attract more investors. This potentially self-reinforcing cycle of increasing activity and total value lock-in would result in a growing, thriving Defi ecosystem within Solana.
So what’s the key to attracting more blue-chip assets? Tools and infrastructure that make tokenization easy for project teams: from inception to liquidity incentivization.
Supporting the provision of liquidity is essential. Providers are increasingly demanding the kind of return on investment that exchanges like Uniswap v3 offer, giving users the ability to concentrate the liquidity they provide at individually set price ranges to maximize returns. Liquidity pools that combine V3-style concentrated liquidity with automation are also seeing growing demand.
Another way to encourage greater engagement across the ecosystem is to introduce staking mechanisms that do not force users to make the impossible choice between yield and voting power.
Introducing such tools to Solana would attract a more diverse group of users and make it easier for projects to build healthy and engaged communities. Among other things, Solana needs an infrastructure that supports a new type of staking – one that provides governance and enables the sharing of protocol rewards, while at the same time allowing community members to retain a say in how their assets are distributed through a decentralized organization .
With the right tools and infrastructure, and a resulting influx of new users encouraged by general support, Solana may indeed be the soil on which Defi 2.0 will thrive.
Tommy Johnson
Tommy Johnson is co-founder of PsyFi, a Solana-based options protocol that is building a suite of open-source, accessible financial tools and products that enable users to tailor investment strategies to their risk/reward appetite. Through PsyFi’s partnership with the Hxro Network, Tommy also recently worked on the launch of Armada, a set of tools for launching and managing “public goods” tokens for the Solana ecosystem.
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