This year could be pivotal for decentralized finance (DeFi). In 2021, DeFi innovation stagnated even as the crypto market soared to record highs.
In 2022, a spate of DeFi hacks and centralized finance (CeFi) failures shattered confidence in the industry and the achievable rate of return plummeted to near zero. The coming 12 months will be crucial in shaping the future of DeFi as a viable option for mainstream investors.
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From the high of $180 billion to a current low of $41 billion, DeFi has ridden a turbulent wave. The total value (TVL) locked in DeFi protocols is currently at levels last seen two years ago after reversing gains accumulated through 2021. Much of this decline in TVL is due to the falling price of DeFi assets like ETH, CRV, and AAVE.
But the malaise affecting the DeFi industry is not a price issue, just a symptom of the real problem — a lack of innovation. DeFi as we know it came to life with the launch of Uniswap in late 2018. As the first truly usable decentralized exchange (DEX), it can be credited with much of what followed: multi-tokenization, DeFi primitives for lending, borrowing and trading, and the invention of everything from yield farming to algorithmic stablecoins.
In its first two years, DeFi thrived as developers and users fell in love with the tools that created decentralized systems for wealth management, savings, and payments. Sometime around 2021, however, this Cambrian explosion of DeFi innovation slowed to a crawl. An industry that started with the promise of opening unbanked banks degenerated into a series of increasingly sophisticated Ponzi schemes, fueled by unsustainable returns and impossible APYs.
Transforming the DeFi landscape
If 2021’s DeFi motive was stagnation, last year’s was contagion. While the events that rocked the crypto market in 2022 need not be recounted, they proved that neither DeFi nor CeFi are immune to the same human weaknesses that toppled great empires: greed, envy and fraud. From the $2 billion lost to bridge exploits to the multiples lost to the collapse of Terra’s algorithmic stablecoin and the domino effect that followed, last year’s winners were the projects that are still standing stayed.
One of those survivors was Yield App (YLD). By adhering to its strict investment risk management framework to avoid the temptation of UST and similar failed DeFi products, the digital wealth platform saved its users from financial ruin.
As hacks proliferated and yields plummeted, it became clear that the future of DeFi depends on whether it can evolve. At this point, Yield App set out to create a novel solution: a system for capturing the most successful elements of DeFi without the dangers that drove investors away in droves. The result of this return to the drawing board is Haven1, a protocol radically different from anything done in DeFi.
DeFi finds its safe haven
Haven1 was designed as a secure network for institutional and professional crypto investors to interact without fear of hacks or exploits. It seeks to provide all of the use cases available in DeFi — lending, saving, trading, yield — without the risks that have made DeFi an adversarial environment.
Haven1 is designed to operate as an Ethereum sidechain and is fully KYC compliant and compliant. Not much fun if you’re a rapier trying to break into the latest memecoins, but extremely useful for professional investors trying not to be frontline, phishing, or robust.
The challenges of creating a permissioned blockchain that come with the permissionless world of Ethereum and everything else beyond it are significant. How do you capture the most successful elements of DeFi and integrate them into a regulatory compliant chain without destroying everything that makes decentralization so appealing?
Attempts to found “CeDeFi” have so far failed. Remember the staking programs on centralized exchanges and the type of credit systems that fell victim to the great crypto meltdown of 2022.
In light of these flaws, the Yield App team has thought carefully about how to improve on the most exciting elements of DeFi. Indeed, The Yield App CEO Tim Frost has previously shared his thoughts on DeFi investing.
Proposed use cases include on-chain lending based on real credit scores, similar to traditional personal lending. The verifiable identity framework also supports the integration of blockchain with real assets. This could, for example, allow NFTs to serve as proof of ownership, which in turn would facilitate the creation of real estate-backed investment vehicles.
Haven1 is an ambitious project, and it remains to be seen if it will be embraced by its target audience of HNW and professional investors when the chain, which uses Proof-of-Authority consensus, finally launches. But it is clear that DeFi in its current form is unpalatable to many aspiring users who may have once been resilient enough to ever regain full confidence in permissionless protocols.
The future of DeFi
Expect regulatory scrutiny to only intensify as DeFi faces its biggest year yet. If 2022 was all about survival, 2023 is about navigating a new landscape where compliance is key. This might not be the stuff of 100x returns and triple-digit APYs are made of, but if DeFi can safely deliver sustainable returns, it could bring financial independence to millions.
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