The Future of DeFi
Decentralized Finance (DeFi) is a fast growing, and even faster evolving, area of cryptocurrency. Multi-million dollar projects rise and fall, as they try to keep pace with new innovations that never seem to stop. It is reminiscent of early Silicon Valley, where dozens of tech startups were sprouting up with each new day, but only the most innovative would thrive -with a pinch of luck and a dash of timing.
No one knows for sure what lies ahead in DeFi, but there are some constants that always seem to be important: Security, Liquidity, and Stability
Security – Security in DeFi is seeing a lot of growth, as is the demand for good security engineers, and for good reason. How safe is it? – This to me is the most important factor. The product / platform can be the best performing version available to users, but a hole in security completely nullifies that if it results in a loss of funds. The losses from hacks, errors, and other compromises was estimated to be around $4.4 Billion in 2020, around $10 Billion in 2021, and Q1 of 2022 is already estimated from Immunefi Crypto Losses Reports at over $1 Billion. Most of these losses come from a few compromised protocols. The number of hacks per year does not change significantly, but the size of the hacks does as protocols take on more capital. As more funds are needed for the space to thrive and grow, improved security is essential to accommodate this.
Liquidity – When I say liquidity, I am referring to the available funds a platform pulls from. The higher this value, the more users (and volume) the platform can accommodate. Increased adoption is limited by the funds available to different platforms that fall under the umbrella of DeFi. Cryptocurrency as a whole was only valued at approximately $3 Trillion at the end of 2021, with a few hundred billion used in DeFi applications. For perspective, Apple alone is valued at around $2.67 Trillion and the US stock market comes in at a little over $53 Trillion. There is still a long way to go before there is enough liquidity in DeFi, which should give the space time to lay solid foundations.
Stability – A large pool of funds is great and all, but without price consistency, new adoption may be hard to come by. Cryptocurrency is already at capacity with risk, so to gain more risk averse users there will need to be greater stability. On a day to day basis, if a person is spending money, it is usually some kind of standardized value: once the weight of gold, now more commonly a country’s dollar. While yes, there is international volatility of exchange between dollars over time, most people in an ideal situation are accustomed to it being relatively stable, barring inflation. Due to this, one of the primary goals of many groups of individuals trying to innovate in DeFi is to create the most stable on-chain dollar or a dollar equivalent.
There are many more aspects to consider, mainly revolving around making the experience and interactions with DeFi easier and more familiar to people, but the three described above are where the bottleneck seems to be. Projects usually figure out one or two of these, but then have trouble solving the third.
An external concern for DeFi is the government. It seems most governments do not know much about cryptocurrency, and their “deep dives” seem more like speculation rather than a thorough understanding of the underlying technology. The reason that is a potential issue is that it is common to have negative reactions to things that are poorly understood. This leads to potential roadblocks for DeFi, as more governments start drafting in depth laws around cryptocurrency.
The various laws introduced around cryptocurrency over the next decade will likely make or break user adoption. Countries that are taking the initiative early and creating what some see as crypto “safe havens” may reap a lot of the benefits if they can make it attractive and easy for businesses and individuals to move and set up shop. Dubai is a good example, with their pro-crypto attitude attracting large amounts of attention. Once logistical and legal aspects are clearly laid out, it will take good user experience to push adoption to the final stages. If DeFi is supposed to be used by everyone, then everyone needs to use it with ease, which is definitely not the case as of this moment.
I see the great potential DeFi has as a sector, assuming some of the bumps are ironed out along the way, which I see as inevitable. I love to solve problems, so problems are what I see first and foremost. Looking from the top of these potential hills ahead, I see more user based financial opportunities. Along with competition and transparency, where protocols have to offer the users more of the earnings, lending and borrowing is determined by capacity of the system and past reliability of paying back debt. This beats the current system which declines users based on how they look, if they have too many online subscriptions, or if they eat too much take out, which is seen as “irresponsible” spending. The more decentralized these options are, the more they have to be competitive due to the lack of control one project has over the space. It may be that one project is the apple of DeFi, but that is one of many elements still to be determined.
