Three years ago was the first golden age of DeFi. Token prices soared and young builders became millionaires overnight. Experts predict transformative potential in sectors ranging from real estate and finance to entertainment.
Today’s Hint: DeFi is considered a shady online space, where criminals take advantage of less savvy users.
The DC Department of Insurance, Securities and Banking (DISB) has an entire webpage title “Beware of decentralized finance” warning voters of the risks.
Do Kwon, once coveted by the mainstream media, is now referred to as a “trash-talking crypto founder” in the New York Times.
When looking at the crash of crypto and DeFi, it’s hard not to think of the bursting of the dotcom bubble over two decades ago, as both are the product of extreme speculation.
Growing interest was at stake in both dramas, while over 80% of the market capitalization disastrously evaporated.
The tech industry rose from the ashes of the dot-com bubble burst and orchestrated the glory of Web2.
Can our industry do the same to build iconic success for Web3?
Where DeFi fell flat and what worked well
DeFi was built based on hype and expectations. Now, projects are struggling to generate revenue and hacks are proliferating, fueling criticism.
We have done a lot of harm. Narratives revolved around speculative transactions without tangible real-world benefits, and misguided practices such as airdrop farming overshadowed sustainable value creation.
Anonymous builders were welcomed but not held accountable for quick exits and scams, irreparably harming our communities.
Privacy is important, but to create a platform that manages the assets of others, accountability is essential: and it is difficult to hold an anonymous entity accountable.
We have achieved instant global settlements and traceable cross-border payments, digital milestones beyond our traditional financial system.
Smart contracts excel in transparency and automatic execution.
DeFi primitives such as lending protocols and decentralized exchanges have flourished.
The problem is that these new mechanisms have been successful within DeFi, but DeFi as a whole has remained isolated, held back by continued media attention to hacks, scams, and mockery.
How to Repair DeFi’s Reputation
- Changing our mentality from speculation to value creation
Gone are the grandiose, poetic claims that DeFi is “the future of finance.”
Stop equating DeFi with the stock market, which continues the narrative that blockchain is only useful for financial gains.
And manufacturers: stop relying solely on token incentives and airdrops to acquire revenue and users.
Any project that relies on these tactics relies on speculation and will fail when token prices fall and parachuted farmers move to pastures new.
Instead, we should emphasize real value creation and create sustainable business models.
Even this year, incredible work has been done in creating real value, such as Jia providing blockchain-based microloans in emerging markets, and Arf reached instant settlement of cross-border remittances.
- Innovate on legal infrastructure
The current regulatory and legal infrastructure is designed for traditional finance and is not suitable for DeFi. At the same time, it is beneficial for humanity to have rules that protect against money laundering and other criminal activities.
Innovation in regulatory and legal infrastructure to leverage the strength of blockchain is key to DeFi’s success. Europe’s adoption of “crypto-asset markets” (Mica) is a big step forward.
The idea of Real World Assets (RWA) is that we can digitize tangible items such as receivables and real estate on the blockchain, digitally recording ownership, allowing for direct exchanges or split purchases.
It’s practical, trackable, and shows a moment where traditional and DeFi sectors can merge.
Traditional RWA protocols take a hands-on approach to finding the appropriate legal structure to comply with different asset classes in different jurisdictions (e.g. treasuries, receivables, real estate). Over time, a more generic structure will emerge.
If we succeed, we can repair DeFi’s damaged reputation, ensure protection and greater participation, attract traditional capital, and make RWAs the best use case for DeFi.
- Holding builders and borrowers accountable
Crypto setbacks have eroded investor confidence.
To progress, we must strengthen social and technical frameworks, guaranteeing the responsibility of builders and borrowers.
Manufacturers must give up anonymity, adopt better security practices and protect themselves against hacking.
Borrowers lack mature credit infrastructure; until then, legal agreements will set responsibility for RWA protocols.
Today, many individuals and institutions are handicapped by the financial resources available in their jurisdiction.
DeFi is an opportunity for a decentralized financial system that gives everyone equal access to global capital.
We can repair DeFi’s reputation by addressing the legal and technical infrastructure required to tokenize RWAs.
Through RWAs, access to global capital frees Argentinian small businesses from 114% inflation, accelerates the growth of Southeast Asian suppliers, and allows unbanked crypto treasures to produce returns via dub bonds. Treasury or other real-world funds.
DeFi has a reputation problem. But lessons from the last cycle can drive adoption of RWAs, driving Web3 innovation while keeping speculation at bay.
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