I’ve seen a few articles in recent days about the death and decline of decentralized finance (DeFi).
The impetus has been DeFi’s recent troubles caused by an exploit and founder of crypto who is a horrible risk manager. In brief: the founder of Curve Finance, a major automated market maker (AMM), lent almost half of the protocol’s CRV tokens to a few DeFi lenders and was almost liquidated after an unexpected but somewhat predictable DeFi exploit has depreciated the price of the CRV.
Adam Blumberg is a certified financial planner as well as the co-founder and chief educator of Interaxis, a company attempting to bridge the educational gap between digital assets and traditional finance. He is a contributing writer for CoinDesk’s “Crypto for Advisors” Newsletter.
The first article was great opinion article in CoinDesk, written by Daniel Kuhn, who said DeFi is “dead inside.” The second was a report of J.P. Morgan, who argued that the sector as a whole is in “shrinking or stagnation mode.” These commentators couldn’t be further from the truth, however.
I don’t think DeFi is dead and it’s not declining either.
The idea of what DeFi was during the summer of 2020 is certainly, and thankfully, dead. It was a time of too much bribery, too much cash and talk of performance. “Yield farming”, the fuel The fire of DeFi Summereventually calmed down and a few decentralized platforms became market leaders – many of which adopted “white glove” professional services in an effort to grow.
But the sector is not perfect. As Daniel pointed out, we also have far too much power in the hands of too few people. This sounds too familiar.
The difference between this technology and the technology of the past is that DeFi has been financialized to the extreme. It’s not ideal when a bunch of programmers start playing financiers.
But we must remember that we are still experimenting with this technology. We don’t know how to use it. Mistakes will be made.
What we’ve accomplished in recent years is building robust systems that don’t operate within the confines of traditional businesses, banking networks, or even geographic boundaries. The system is secure enough that financial heavyweights and companies like Mastercard, Visa, Coca Cola, Anheuser Busch, Nike, Starbucks, BNY Mellon, BlackRock and Fidelity dedicate money and internal resources to use it. technology for greater efficiency.
DeFi will continue to be a challenge. This will become even more difficult as DeFi continues to grow.
These early experiments and business explorations show that DeFi can professionalize and that its market growth does not always need to be driven by FOMO.
Yet while many dream of complete decentralization of all financial systems, the reality will never live up to it…at least not in our lifetimes. What was most difficult to understand was the balance of power between the self-executing code and the humans who build it.
Curve is just one example: you can’t take the human out of humans. But it is okay.
We took the path of decentralization even further with DAO Summer 2021. It became clear that anyone could join a decentralized autonomous organization via a Discord link, start working for newly minted tokens, and have a say in the organization. Until the founders and investors decide to vote, of course. We then return to the company hierarchy.
This is not to be negative, but to say that it works, even if it doesn’t always seem that way. The fact is that DeFi will continue to be a challenge. This will become even more difficult as DeFi continues to grow and collide 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 retain the traditional economic, financial, and corporate system in which the Federal Reserve decides the money supply, banks control the money, and the government tells us what we can and cannot. invest. In this system, large public companies can control our data, and there is little we can do about it.
At the other extreme we have the Degens, or traders, builders and protocol creators who want to vote on everything based on the number of tokens and rule the world with the money earned via computer code.
In reality, we’ll probably end up somewhere in between.
There are still billions of dollars in real estate, private and public companies and debt instruments that all need to be accounted for, traded and borrowed. These won’t be put on chain overnight. But the the world is heading there.
And when we see more assets listed on-chain, DeFi will be waiting to provide lending, liquidity, and transparency. It’s worth saying that Curve CEO Michael Egorov took out loans according to the system, and the world was able to learn about his potentially toxic debt because it was all on-chain. Many people even questioned him. In what other financial area would such dangers be common knowledge?
The successful growth of the DeFi ecosystem and technology has swung the pendulum and shifted the center. It is possible that because DeFi offers transparency, efficiency, disintermediation and self-custody, it will become the norm across the entire financial system. Otherwise, banks will be overtaken by innovation in lending, borrowing and insurance, which gives more people more opportunities to participate.
Experiments aren’t perfect, but that’s why they’re experiences. While Curve’s situation is troubling, the move toward decentralization means we simply have to let the market work. Let protocols, teams and systems make the necessary changes.
DeFi is neither dead nor dying at all. In fact, it was just revealed.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.