DeFi is ready for take-off
by Elitsa Taskova of Nexo
The rising star of decentralised finance…
Planet crypto has circled the financial world on a highly irregular orbit since first entering banking’s heliosphere.
At perihelion, it has glowed bright; at aphelion, it’s barely registered a twinkle.
Reports of its imminent implosion have littered the mainstream media, which has characterised it as an unstable black hole that sucks in the unwary.
Recent events have done crypto’s reputation no favours. However… there are solid reasons to believe that decentralised finance’s (DeFi) star is on the rise.
You can’t “DeFi” financial gravity
First, we must understand that crypto companies (like FTX, 3AC, and others) crashed to Earth for the same reasons traditional financial institutions falter – control was concentrated among few people, and risk management was poor.
DeFi, by contrast, is built on an entirely converse set of standards. Its fundamental principle is that anyone with internet access should be able to access financial services in an unintermediated and permissionless way, trusting a predictable code running on a foundational blockchain layer rather than the subjective decisions of individuals or organisations.
Thus there is no need to trust anyone with your digital assets as they remain in your custody, stored in digital wallets rather than in old-school bank accounts. Also – and this is the clincher – there’s no gatekeeper or financial services provider; this inherently non-hierarchical nature of decentralised organisations means that a collapse similar to the aforementioned centralised examples isn’t possible.
In addition, DeFi can reduce, or even remove, the fees that typify traditional finance processes because there are no intermediaries to charge you for holding your assets.
CeFi as the launch pad for future missions
This is all well and good, but the one thing that all financial services require to thrive is confidence, which often translates into ‘regulation’. Unsurprisingly, the collapse of multiple crypto firms has revitalised calls for regulation. According to Jean-Paul Servais, the new chair of global securities watchdog, The International Organization of Securities Commissions (IOSCO), a regulatory model could replicate aspects of existing structures from other sectors, making it easy to implement.
Meanwhile, the European Union’s new Markets in Crypto-Assets (MiCA) framework, with its focus on the supervision of crypto operators, could provide a thought-provoking foundation for the development of international guidance. It’s among the first attempts globally at creating a comprehensive set of regulations for the cryptocurrency markets.
All this is to say that both centralised financial providers and DeFi are still needed for crypto adoption to progress, namely because centralised platforms are well-prepared on the regulatory compliance front and provide user-friendly entry points to blockchain.
Bringing DeFi down to Earth
Accessibility, ease of use, and a general lack of understanding have been barriers to entry for those not already familiar with the cryptosphere, with significant areas of focus being: security, cost-efficiency, and smart contracts.
Non-custodial solutions have historically struggled to balance usability with safety as losing one’s seed phrase means permanent loss of assets. While there are some non-custodial wallets that allow for restoration of a wallet in the event of missing private keys, these still carry small, but controversial elements of centralisation.
Gas fees have also been a growing concern, given network congestion and the cost of Ethereum. Yet solutions are around the corner with emerging mechanisms like transaction batching and the option to pay gas in coins not native to the relevant blockchain.
Smart contracts are another staple of the cryptoverse, but their potential has only just begun to unfold. One revolutionary application of smart contracts is not only the improved control of clients’ digital assets but the potential to store and manage a self-governed identity on chain, freeing users from having to entrust big tech companies with their information.
Establishing a standard orbit
DeFi’s underlying technology is sound and will ultimately solve real problems by creating a financial ecosystem that is democratised and inclusive.
Whatever detractors might claim, DeFi will help crypto settle into a more predictable orbit. People are only now recognising the need for self-custody, and builders developing such solutions are working to replicate successful financial products in DeFi. Once we hit this milestone in crypto’s space odyssey, end-users will be free to choose the level of centralisation or decentralisation they use.
And from there, ‘per aspera ad astra’.