The Future of DeFi
“DeFi’s performance in 2020,” says Forkast, “has put the entire crypto market on notice.”
With assets increasing in value, even some of the traditional crypto companies are wanting in on the action.
According to DeFi Pulse, the total value locked in DeFi is more than $16 billion (US Dollars). As of December 2020, this is an increase of more than 2300% since January of that year.
Unfortunately, this boom has attracted a lot of criminal activity. Crypto analytics firm CipherTrace recently reported that total losses from DeFi thefts in 2020 exceeds $100 million.
In the second half of the year, half of all cryptocurrency thefts were from DeFi protocols.
And centralized exchange KuCoin had about $19 million liquidated by thieves using decentralized exchanges.
The DeFi industry is still in its beginning phases. There’s plenty of room to grow but it’s suffering “the same growing pains as the crypto space as a whole.”
Despite the benefits and returns, DeFi may still be a risky endeavor for investors.
What We Can Do:
Here are three of the biggest bottlenecks to DeFi’s growth, as Entrepreneur sees it, and some ways we can resolve them.
Volatility:
“It may seem strange,” says Entrepreneur, “to imply that there are issues with an industry that’s worth over $50 billion at the time of writing—but keep in mind that it was worth $80 billion just a week earlier, according to data gathered by DeFi Pulse.”
For many, this extreme volatility is what’s exciting. It offers exponential short-term returns on their investments.
For others, that volatility is terrifying. They’re afraid to risk anything. The so-called “DeFi Summer” of 2020 saw projects like Uniswap and Compound “pull gargantuan market caps” as they introduced millions in liquidity to this new financial community.
However, months afterwards, many of these fell sharply in value “after the initial wave of hype died down.”
“Even worse,” Entrepreneur reports, “many over-leveraged users of these platforms saw their holdings disappear the next February and May, having billions of dollars worth of coins liquidated as a result of a tempestuous market.”
One solution to this volatility is stablecoins.
These are cryptocurrencies tied to the value of traditional currencies such as the US dollar.
Tokens like USDC, Tether, or DAI allow less reckless investors to try DeFi without worrying about such wild price swings.
China’s latest venture into Central Bank Digital Currencies might have the potential to replace bank notes as the new standard for currency exchange. This would allow people all over the world to utilize DeFi protocols.
Canada and the United States are also looking into creating cryptocurrency exchange-traded funds (ETFs). While they are not decentralized, these funds are a way “for investors in traditional exchanges to gain exposure to potential profits from DeFi projects while limiting the risk.”
Decentralized ETFs are also being explored. Entrepreneur reports that the DeFi Pulse Index looks good. This might be a good way to create a less volatile asset.
Accountability:
One of DeFi’s strongest selling points is that decentralization.
“The optimistic point of view,” says Entrepreneur writer Bryce Welker, is that replacing laws and institutions with smart contracts and blockchains will prevent the corruption, fraud, and inequity that has plagued our existing financial systems.”
It sounds like some sort of science fiction utopia—an impartial system backed by automation. But the reality is that “the darker elements of human nature” can still interfere with the development of this utopia.
For example, although Bitcoin’s technology is designed to be almost impregnable, it still might be vulnerable to an attack.
And the cryptocurrency platforms don’t always live up to their utopian promises. “In that context,” says Welker, “it’s hard to be optimistic about the Ethereum Foundation’s ability to address the pervasive scaling issues that are causing ludicrously high gas fees on every transaction.”
To fix this, we need to put accountability in the hands of the people who deserve it most—those invested in making the best decisions for the project.
People who utilize DeFi are often issued governance tokens for their participation. The intended use of these tokens is to cast votes on any decisions the project will face in the future.
Another way to promote accountability is to create competition.
Alternate blockchains like Cardano are currently trying this approach with Ethereum, promising similar benefits like faster transaction speeds, lower fees and greater energy efficiency.
Perception:
If you asked someone whose only exposure to DeFi was breaking news, Welker says “he or she would probably describe it as a mix of tulip speculation, money laundering, and a casino.”
Perception is probably DeFi’s worst enemy, and a leading cause of the first two problems.
“It’s tough to justify,” adds Welker, “getting involved in a financial ecosystem that can seemingly collapse from a single tweet made by a known market manipulator,” as when Elon Musk tweeted about maybe taking Tesla private.
The worst-case scenario is that users will simply return to a centralized institutions like banks and stockbrokers for solutions to this problem.
World governments and financial magnates would love to get their hands on this technology because it poses a threat to their existing power structures.
Welker feels that the only way the financial movement can attain its full potential is to “reinvent itself as a separate entity from traditional economics and a fiat currency.
If you stop thinking about Bitcoin, Ethereum, and altcoins in terms of their dollar value, you can escape the hegemony of the dollar and the ticking time bomb of hyperinflation.”
Final Words
Most people are only familiar with DeFi on a surface level: they know it has the potential to widen financial inclusion, for example, or to encourage permissionless innovation.
Entrepreneur feels that many skeptics just don’t fully grasp the opportunities it presents. ‘Many entrepreneurs,” they say, “have chosen to get on board because DeFi, by nature, removes many of the barriers to entry that prevented small-/mid-size enterprises and start-ups from entering the market.”
“DeFi today is still very much the Wild West,” says Worth. “Thieves, federal investigations, cyberattacks, and a new class of brash capitalists chasing a gold rush: it’s the American love story with capitalism, exported on a global level.”
“DeFi is the new lemonade stand,” Entrepreneur quips. “The time has come to address the most significant issue in centralized finance: too few people are in control.”
The concept of the lemonade stand is an apt one: you’re providing goods or services your fellow humans want or need, and they pay you for them. There’s no need for an intermediary like a bank or financial manager.
It’s also appropriate in that it takes very little real money to set up such a “lemonade stand.”
Creating a lemonade stand isn’t just about starting a business, either. It’s about contacting other people, forming networks that can work to everyone’s favor in the future.
“Anyone in the world,” says Entrepreneur Magazine, “should be able to create a marketing strategy for their project or product without facing multiple insurmountable roadblocks along the way.”
DeFi offers such a chance for the entrepreneur. More importantly, this concept can benefit any type of business model, concept, or idea.
All you need is a good idea, an internet connection, and a few minutes to set it all up. Spend some more time researching and getting to better understand the power of DeFi.
Then you can set up your own lemonade stand. 😉
