Will DeFi’s Fate Mirror The ICO Craze Of 2017, Or Is It Here To Stay?
The DeFi space has dominated the conversation in the digital asset and cryptocurrency industries for months now, racking up millions of dollars in digital assets in a short space of time. Is it a fleeting fad or a new staple of finance?
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Q2 2020 hedge fund letters, conferences and more
Below you will find thoughts and predictions on what the future might hold, from DeFi leaders around the world such as Ontology, NEM, Definer.org, and Cosmos, and more.
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Rising Interest In The DeFi Space
Justin Banon, CEO and Co-founder of Boson Protocol, a decentralized infrastructure connecting smart contracts to real-world commerce and its data, said:
“DeFi has garnered massive interest in recent months because it affords the ability for anyone, no matter who or where they are, to create their own financial products without rent-seeking or interference from the institutions that currently gatekeep the capital markets. That is quite simply a revolutionary proposition. DeFi has opened up a whole new world where people are able to make their capital work for them. It may be following the classic hype cycle at the moment, but make no mistake: this is an exponential technology that is just getting started. The revolutionary nature of having access to permissionless, transparent networks for financial products cannot be overstated. We see the relationship between dCommerce (decentralized commerce) and eCommerce as analogous to the relationship between DeFi and CeFi (centralized finance). It is all about unbundling the tightly controlled monoliths of the incumbents and allowing the brightest and the best to build the products that are useful to them.
I don’t see the current boom as a bubble – I expect to see the total value held in DeFi protocols to keep soaring. As the ecosystem matures, we should see networks adopt a more evolved attitude to customer acquisition and retention than having the best memes, or one-time airdrops. In the longer term, protocols will face the same challenges for product differentiation as traditional financial services – and this is when they may want to look at incentives with a higher perceived value rather than simply engaging in a race to the bottom. The cognitive complexity of some of the ideas is probably a deterrent to many people, but much can be solved by simplifying the user interfaces alongside risk mitigation through insurance. Building awareness of the possibilities and the risks, as well as improving the user experience, is key to mass adoption.”
The Permissionless Nature of DeFi
Erick Pinos, Americas Ecosystem Lead of Ontology, a high performance, open source blockchain specializing in digital identity and data, said:
“There is a high appetite for DeFi because it provides useful decentralized alternatives to existing centralized financial services. Decentralized exchanges are gaining traction, with Uniswap reaching trading volumes rivalling major exchanges. There is also increasing demand for lending and borrowing, synthetic derivatives, insurance, and more. Of course, the ‘yield farming’ mania helped catapult DeFi into the spotlight thanks to the high, albeit unsustainable returns on investment. However, even as the hype dies down, demand for DeFi will continue growing. Unlike ICOs, many DeFi services have working products with daily active users.
DeFi is unique because of its permissionless nature. Sure, anyone can start a lending service for cryptocurrencies. But a DeFi lending service is composable, allowing third-party developers to integrate it into their own applications, stacking these services on top of each other like building blocks and creating interesting new financial instruments that were previously impossible to make. Examples of such amalgamations are borrowing tokenized insurance, paying bills with synthetic derivative index funds, and lending fractionalized assets.
Regulations are a large challenge to DeFi. Current regulations are outdated and do not account for all the specific outliers when dealing with DeFi. Regulation is indeed important to ensure that DeFi does not become a breeding ground for scams and criminal activity. However, regulations and policies need to be re-thought from the ground up to better regulate DeFi while allowing it to grow. Another challenge is usability. DeFi is difficult for most people to use, as often you need a MetaMask and a working knowledge of how cryptocurrencies and decentralized applications work just to get started. The user interfaces of many DeFi projects also prioritize tech savvy users over non-technical users.”
Democratizing Access To Financial Products
Ethan Buchman, Co-Founder of Cosmos CEO of Informal Systems & Vice President of The Interchain Foundation, said:
“Defi is interesting as a use case for rapidly experimenting with new financial products with considerably less friction. It’s a huge step forward for democratizing access to financial products and the design of new ones. At the same time, most DeFi systems carry a considerable risk that is not always obvious. While in principle the mechanisms are much more transparent than any traditional financial product, the general volatility of cryptocurrencies, the immaturity of DeFi smart contracts (ie. the potential for bugs), and the possibility of miner interference (ie. “Miner Extractable Value”) collectively make DeFi a dangerous place to play.
DeFi doesn’t materially change the systemic structure of finance; instead, it simply reimplements much of it on more transparent infrastructure. Like much in crypto, DeFi is based heavily on speculation and arbitrage. There’s still little in the way of concrete use cases that make a real difference to the average person. With DeFi, we’re still building zero-sum games, though with less information asymmetry. Less information asymmetry is a good thing, but fundamentally we need to be building non-zero-sum games.
Multiple DeFi projects are being built in the Cosmos ecosystem: two popular mainnets with DeFi functionality are Kava and Terra. Other Cosmos-based projects are attempting to connect DeFi to real-world causes, like Regen Network’s approach to realign the economics of agriculture, and the IXO Foundation’s approach to social impact bonds. I’m looking forward to the launch of these projects and the reorientation of DeFi from a playground for speculative bubble finance to a foundation for a more sustainable financial system.”
Low Barrier To Entry
Nicholas Pelecanos, Head of Trading at NEM, said:
“DeFi is garnering a lot of attention in crypto circles as a great disruptor to the traditional banking system. The recent boom in the DeFi market follows the well documented innovation adoption curve. Growth for an innovation, in this instance DeFi, is largely led by technological advancements, followed by capital and regulatory growth. Therefore, the overall growth of the space or ‘development’, is a function of usership, technological and regulatory growth, and capital.
As development increases in the DeFi space and new breakthroughs occur, the foundation for further development expands. This steepens the development curve, which then increases the overall utility of the space, resulting in a greater capacity to handle new capital, users and business. It is worth noting that DeFi is currently on the knife’s edge in terms of its capacity to handle capital and could easily fall into a bubble.
At its core, DeFi is providing a means of decentralised lending, lenders earn a yield and the loan is secured by some amount of collateral in the form of a token. That being said, DeFi is still very much in its infancy, with the infrastructure and processes still in the experiment phase – this was proven by the recent YAM finance collapse which recently fell 90% in value due to a bug in its code.
DeFi’s low barrier to entry is perhaps what makes it most attractive – as both decentralised and permissionless, it removes the need for onerous permissions, significantly levelling the playing field by allowing everyone to participate. The potential benefits for both businesses and individuals are exponential, and I believe that this is just the beginning for the DeFi space.”
Tokenizing BTC On Ethereum
Konstantin Richter, CEO of Blockdaemon, said:
“With how things are trending and gaining a foothold in the market, DeFi is here to stay. Though there are still many kinks to be worked out, it’s clear that many DeFi products have already found product market fit. The pace of innovation is incredibly rapid and pushing the market forward.
There are a few different methods for tokenizing BTC on Ethereum already with more trustless versions, like KEEP Network, getting ready to launch soon. With the advent of yield farming, protocols are looking to attract liquidity to their platforms by providing liquidity providers with a governance token in exchange for their liquidity. As it becomes easier to tokenize BTC on Ethereum, I anticipate more protocols targeting BTC as an asset for yield farming to tap into the deep liquidity and network effects.
Simply put, the 10,000%+ APY we are seeing on yield farming is not sustainable. Most of these experiments are likely to fail, but the ones that survive have a real shot at being the future of finance. We are witnessing the birth of a digitally native, parallel financial system that may just be a black hole that sucks in value from almost anywhere. Most of DeFi revolves around providing infrastructure to traders and speculators (exchanges, leverage, lending, insurance etc). These are all primitives for building a more robust economy, but also happen to align well with speculation.
The current DeFi boom, in regards to the high returns and optimism, feels eerily similar to the ICO boom. However, it is different thus far in the quality of projects, lack of retail (at least thus far), and investors demanding more from the projects they choose to put their money into.
The advent of fair launches and yield farming are a significant improvement on the ICO model from 2017: projects go beyond a just concept and vision to having a working product, and more projects on the whole have legitimate use cases. On the other hand, the recycling of money and leverage creating crazy pumps seemingly out of nowhere certainly rhymes with what we saw in 2017. It will be telling to see over the next few months how DeFi will learn from mistakes of 2017 and create a stable future for finance.”
Token Economy Is Fueling The Prices
Jason Wu, CEO and Co-founder of Definer.org, the decentralized financial network for digital loans, savings, and payments, said:
“DeFi prices are being fueled by the token economy — DeFi protocols are introducing new tokens, leading to speculation and enthusiasm. The rising prices of DeFi tokens keeps the returns of each DeFi product at record highs, which attracts more and more people. It’s a beneficial cycle which is driving up the price of DeFi. With the influx of capital in the DeFi space, projects are building more applications for the next generation of financial networks. The DeFi mania we see in the market right now is therefore helping in our mission to transform the world of money. This in turn will boost adoption.
Notably, the current surge in DeFi contains a number of similarities to the ICO boom a few years ago — token and secondary market speculation is driving market movement and new buyers are coming in because of the opportunity to make ‘easy’ money. However there are also a number of differences between the DeFi surge and ICO boom, which indicate that DeFi is much more sustainable. For example, the market is more mature, with seasoned investors getting involved through considered strategies. The level of overhype in mainstream markets is significantly less than we saw in 2017 and 2018 with ICOs.
The future of DeFi will be largely impacted by Eth 2.0, which will improve the service quality of DeFi, making it cheaper and faster. With an improved throughput of ETH, the infrastructure of DeFi, we can serve more people. Also, as assets under management in DeFi keep increasing, we will also have to look to regulation. In order to bring DeFi to the mainstream, the industry needs to figure out a regulated way of offering the DeFi services.”