The decentralized finance industry undoubtedly has vast potential — the value locked in it has exploded, surpassing $14 billion this month. Though there is speculation over whether decentralized finance is yet another bubble, I believe it is here to stay. How it stays, however, is another matter that depends on how DeFi handles ongoing hacks and other vulnerabilities, how centralized finance incorporates DeFi’s leading features and vice versa.
DeFi encompasses everything that the crypto space fundamentally stands for: democracy, power to the unbanked and underbanked, transnationalism, a truly global and shared economy, all of which many would consider financial utopia.
Yet no utopia has ever come into existence, and no extreme can sustainably progress toward its end goal unchecked. The enfants terribles in history usually meet an unhappy end unless they adapt to the realities of a less-than-utopian world. A golden mean between CeFi and DeFi must be met — both “factions” stand to benefit from it, as does the whole space.
What DeFi can take from CeFi
A lack of comprehensive and effective security auditing in DeFi has led to millions of dollars worth lost from hacks, which, seen through the lens of the world outside of crypto, where the CeFi–DeFi distinction is blurred, damages the reputation of the entire space. Within crypto, this has very much positioned DeFi as an enfant terrible, and for good reason — among code bugs, flash loan attacks, system vulnerability exploits and token design issues, there were more than 20 major DeFi hacks in 2020 for an amount topping $100 million.
Thankfully, over the past months, there has been increasing acknowledgement of the importance of better auditing — and auditing in general — among larger DeFi players and their communities. This is the first step in the right direction.
Auditing for DeFi is, of course, just as nascent an occupation as the industry itself, and while this means it is not yet up to scratch, it also leaves ample room for change and improvement — perhaps even for the development of an entirely new sub-industry, complete with standards and certifications, to address this single greatest weakness of DeFi. That security auditing model and best practice can be taken straight from CeFi and adapted to incorporate DeFi’s specifics.
The next step would be financial audits, which would address potential vulnerabilities from a market perspective. This would be a collaborative effort between traditional and digital finance, and it’s something that CeFi players are leading the conversation in.
With these issues covered, another DeFi challenge would be partially tackled: attracting institutional investment to guarantee long-term development. While DeFi’s anonymity, by default, inhibits large-scale capital inflows because institutional investors cannot enter into contractual obligations with an anonymous counterparty, better security would facilitate a relationship between CeFi and DeFi in this direction.
A similar issue emerges on the retail side, which is just as important in driving mass adoption. The complexity of most DeFi platforms makes them inaccessible due to the high degree of technical knowledge required to use them. This limits DeFi platforms’ chances of expanding their user base, in turn, making a breakthrough into the mainstream unlikely and stunting their growth potential. CeFi products, on the other hand, enjoy much greater adoption rates due to their user-friendliness and proximity to traditional digital banking tools. These formats can be transferred onto DeFi protocols to enhance user acquisition and retention.
Furthermore, there are currently ways in which DeFi is successfully adopting centralized components, and the fact that a substantial amount of wealth on DeFi platforms is held in stablecoins — the products of centralized organizations — is perhaps the best case in point. As such, stablecoins serve as a much-needed bridge between DeFi and CeFi.
What DeFi can give CeFi
There is much to admire about what DeFi has brought to the table this year, not least that it has presented opportunities for the unbanked to access banking services, offering the democratization that our entire space aims for.
Though blamed for most hacks, flash loans are DeFi’s absolute hallmark in that they are a prime example of how finance can be effectively democratized. In enabling anyone to operate like a whale and take advantage of market situations that would otherwise be unavailable to them as a smaller investor, they eliminate the phenomenon of the rich getting richer, while the less-wealthy stagnate due to a lack of financial tools or liquidity at opportune moments. With CeFi’s greater security and user-friendliness, these opportunities can be amplified and presented to an entire market of potential unbanked and underbanked users.
There are also positives to take from some of the DeFi projects that collapsed this year. The “right to fail” is an important part of the learning process for an industry as young as ours that makes us more resistant, even anti-fragile. This is in sharp contrast with traditional finance, where mistakes, big and small, are swept up thanks to governments and central banks’ interventionist policies. I believe this to be the fundamental flaw of the current financial system. Our space demonstrates how the true forces of the market are played out, and DeFi, with its many hacks over the past year, has illustrated this perfectly. I admire the likes of Harvest, Value DeFi and Yam for flagging their mistakes. It goes to show that the whole crypto space, in general, is maturing and growing stronger.
As DeFi currently stands, it is unlikely to spill over the borders of its own niche despite the steep climb we witnessed in 2020. It will plateau over the coming year as some projects fail and disappear, while others adapt and put into motion mechanisms to self-regulate, giving way to a more sustainable modus operandi that is better aligned with CeFi’s.
A combination of DeFi’s ideals — a system without vertical authorities where proceedings are democratically and transparently agreed upon by the community — and the security measures and ease of use brought by CeFi will facilitate mass crypto adoption to ultimately yield a fairer financial environment.
DeFi Total Value Locked Hit ATH as Crypto Market Sees Resurgence
The decentralized finance (DeFi) ecosystem has printed its highest Total Value Locked (TVL) today, riding on the back of the resurgence in the broader market. Per data from DeFi Llama, the TVL covering all blockchain protocols is now pegged at $223.23 billion, a massive uplift from the $21.4 billion recorded from January 1 this year.
Per the DeFi Llama data, decentralized exchange liquidity pool on Ethereum designed for efficient stablecoin trading, Curve Finance, maintains the largest share of the pie with a value of $17.08 in TVL. Lending protocol, Aave ranks next with a total of $17.02 billion, while Maker also comes off with a total value locked of $15.43 billion. The growth of the DeFi ecosystem has largely maintained an upward trajectory, as more investors, including retail and institutional investors, began leveraging the earning options the emerging protocols that make up the ecosystem offers.
DeFi creates the most direct threat to traditional finance as the emergence of lending protocols for instance has lowered the barrier to entry for accessing loans. Many new investors also find it easy to commit their funds into the DeFi ecosystem as these protocols are governed by smart contracts, which makes them non-susceptible to the lapses of human-fueled organizational management.
Future Growth to be Backed by Mainstream Market
There is a more positive outlook in the broader digital currency industry, fueled by the optimism of approval of the first Bitcoin Futures Exchange Traded Funds (ETF) in the U.S. Per an earlier Coingape report, the ProShares Bitcoin Strategy ETF could be coming as soon as next Monday, October 18, marking an end to the undying anticipation from investors about such a product.
With the advent of the ETF, more funds will be pumped into the entire industry, and there is bound to be a trickle into the DeFi ecosystem. A number of investment managers, including Grayscale, are beginning to provide funds that track the performance of DeFi protocols, opening up additional avenues for more embrace of the DeFi tokens.
Besides the TVL, the tokens of DeFi projects are also seeing an additional boost with all protocols inking a market cap of $137.47 billion according to data from CoinMarketCap.
Report: Driven by DeFi, North America’s crypto volume increased 1,000% year-over-year
Digital analytics firm Chainalysis reported that the growth in North America’s crypto market has been driven by the rise in popularity of decentralized finance.
In its 2021 Geography of Cryptocurrency Report, Chainalysis said the monthly crypto transaction volume across North America grew by more than 1,000% from July 2020 to June 2021. The monthly volume reached a peak of $164 billion in May 2021 before dipping to just over $100 billion in June.
According to Chainalysis’ report, decentralized finance, or DeFi, was largely responsible for North America continuing to maintain its position as one of the largest crypto markets worldwide. DeFi transactions represented 37% of North America’s overall transaction volume from July 2020 to June 2021, with residents sending roughly $276 billion in crypto to platforms in the DeFi space.
The Central, Northern and Western Europe region sent the most in crypto overall — $389 billion, roughly 40% of its overall transaction volume during the same time period. Chainalysis said “DeFi whales” were responsible for turning the region into the world’s biggest cryptocurrency economy, with the majority of institutional-sized transfers going towards platforms in decentralized finance.
However, the report said North America’s DeFi transactions were led by retail investors in the last year, with many transactions under $10,000. Uniswap was the most popular DeFi platform in North America, with users having sent more than $100 billion in transaction volume between July 2020 and June 2021.
“Right now, DeFi is targeted towards crypto insiders,” said dYdX growth lead David Gogel. “It’s people who have been in the industry for a while and have enough funds to experiment with new assets.”
In addition, Eastern Asia’s crypto market has been declining, likely driven by the regulatory crackdowns on China’s crypto industry and mining in the region. Chainalysis reported P2P trade volume in China had dropped significantly over the last year, ranking the country in the 155th position worldwide compared to 53rd the year prior. Though Eastern Asia still received $591 billion in crypto transactions between July 2020 and June 2021 — a growth of 452% year-over-year — the firm labeled the region as the “slowest-growing” in its analysis.
“Mining isn’t the only part of China’s cryptocurrency economy affected by the crackdown,” reported Chainalysis. “The government has taken other actions such as campaigning against cryptocurrency in state-sponsored media, placing official warning messages on cryptocurrency-related apps, and potentially leaning on social media companies to suppress cryptocurrency-related content.”
DeFi Presents Multi-Billion Dollar Use Case To Disrupt Foreign Exchange Market, According to Shark Tank Star Kevin O’Leary
Shark Tank star Kevin O’Leary is saying that the foreign exchange market is a multi-billion dollar use case for decentralized finance (DeFi), a form of blockchain technology that supporters claim can revolutionize financial services by eliminating the need for intermediaries.
During this year’s SALT conference in New York City, O’Leary relates how investors must rely on foreign exchange middlemen to invest in overseas markets. He says the extra steps required in such dealings are often unnecessary and burdensome.
“Let’s say a traditional mandate, such as I want to go long Europe, I’m going to buy 50 stocks. I have to buy Swiss francs, Euro-based stocks and British pounds because I want to trade them on their domestic exchanges.
In between me and that transaction is what’s called the bane of the earth – the FX trader, the currency trader who clips me every time I buy and sell. Adds zero value and sucks friction out of the system. I can’t wait until we solve this problem and give them a new career shining shoes, because they add no value whatsoever.”
The celebrity investor believes that DeFi has the potential to eliminate costly middlemen from the foreign exchange market system.
“This is where DeFi can take us, on just one use case. But it’s a multi-billion-dollar one, and I want to be alive to have a regulator domestically allow me a payment system to a Swiss franc, back and forth if I want to trade it 50 times a day, with zero FX traders. That’s my mission in life, to help them find a real job.”
In May 2020, O’Leary led a $20 million fundraising round for what is now WonderFi Technologies, a Canadian firm that plans to launch a platform to simplify access to DeFi.