What DeFi offers beyond lending for crypto speculation
DeFi advocates argue that its nascent industry will continue to grow and eventually deliver on its promises.
“By removing the need to rely on middlemen, DeFi makes traditional banking far more accessible.”
Leading DeFi protocols are now seeking real-world exposure.
DeFi “has passed the threshold of speculation and investment.”
Decentralized finance (DeFi), which isn’t so decentralized after all, is going through a period of soul-searching right now. Ever since Terra collapsed in May and brought a number of platforms with it, there has been a prevailing feeling that DeFi doesn’t offer much beyond circular lending and recklessly leveraged speculation, the kind that can cause a chain reaction of failure if a domino falls.
Given that Terra’s failure resulted in other failures, there is certainly something to this suspicion. However, figures working in the crypto and DeFi sector confirm that DeFi is still a young field and will mature and solidify as it evolves.
In fact, many argue that there will be increasing integration between DeFi and legacy finance in the coming years, while it will also find applications in areas outside of finance, such as the Internet of Things, digital ID and data storage. And the more it does this, the less it will revolve around the volatile practice of lending and borrowing almost exclusively for speculation.
DeFi’s potential beyond speculation
There has been no shortage of criticism of DeFi since May, when Terra’s de-pegging and collapse rippled across the room.
In response to several platforms stepping in to help prop up the sector, software engineer-turned-crypto-skeptic Stephen Diehl noted in late June that “most of the decentralization rhetoric in crypto is aspirational at best and just empty marketing at worst .” Meanwhile, MetaMask co-founder Dan Finlay told Vice in July that “a lot of the collapses that happened during this last round were things that labeled themselves as DeFi, but were actually operating as shadow banks with massive leverage.”
One commentator even suggested that “DeFi is dying” in response to this summer’s collapse, while two other prominent crypto-skeptics, David Gerard and Amy Castor, collaborated on a “dead and dying list” for Defi in late June. Meanwhile, FTX founder Sam Bankman-Fried compared DeFi yield farming to Ponzi schemes.
Basically, the driving force behind all these criticisms is that too much of DeFi involves highly leveraged speculation: platforms will take deposits from users after promising high returns, then use those deposits to lend to other platforms or make investments themselves. Of course, since the crypto market is so notoriously fickle and unstable, it’s rarely a good idea to speculate with other people’s money.
However, there are still many defenders of DeFi within the crypto sector, all of whom continue to affirm that the space will continue to grow and eventually deliver on its promises. This includes Jason Ma, director of business development at Web3 Infrastructure Network Axleswho tells Cryptonews.com that DeFi is a natural development of today’s financial system.
“DeFi eliminates intermediaries and central supervision, makes financial markets more accessible to retail investors and creates new investment opportunities. Decentralization democratizes banking and finance by ensuring easy access to financial services for all, especially in developing countries, he said.
As for its potential, Ma argues that DeFi leverages a number of strengths from the use of blockchain technology, such as transparency that can improve due diligence and help people identify and avoid potential financial fraud and harmful business practices. Likewise, immutability via smart contracts provides additional protection against bad actors and fraudulent transactions.
Other people agree when it comes to revealing the future potential of DeFi, even if it has yet to live up to it.
“DeFi is potentially one of the most compelling use cases for cryptocurrencies, as it enables the execution of any business logic on-chain, in a transparent and trustless manner,” said Till Wendler, co-founder of economy-of-things blockchain technology provider peak.
This kind of testimony is not hard to come by, with crypto commentators making some bold claims on behalf of DeFi and where it will end up in the longer term. To
Pedro Isaac Lopez, Chief Growth Officer at THORWallet DEXDeFi is a “critical component” in building a more inclusive global financial system.
“By removing the need to rely on intermediaries, DeFi makes traditional banking services far more accessible and opens up the range of innovative tools enabled by blockchain technology. These services and tools include swapping, borrowing or lending, generating returns from crypto assets via pooling and yield farming, he said. Cryptonews.com.
Lopez points out that even after the recent downturn and subsequent collapses, the total value locked in the ecosystem’s DeFi platforms hovers around $70 billion, per DefiLlama. For him, this is a sign of the robustness of DeFi, and an indication that it will ultimately be used to distribute and manage capital more efficiently and adapt to changing market conditions in a way that was previously impossible.
The present and future of DeFi
Skeptics are likely to argue that such ambitions have still not been realized, and possibly never will. That said, there are plenty of examples of DeFi platforms achieving things in the present, rather than just signaling towards a utopian future.
“As an example MakerDAO society recently passed a proposal to integrate a US bank into its security system, said Jason Ma, referring to the US-based Huntingdon Valley Bankwhich now has a debt cap with MakerDAO of US$100 million after Maker’s community voted to accept it into its ecosystem.
“It will be able to borrow the sum in DAI by depositing collateral in an off-chain account. Five other real-world assets have been integrated into MakerDAO, with more proposals under discussion at the board,” Ma added.
Maker also recently voted to allocate USD 500 million in DAI to US Treasury bills and corporate bonds, meaning that DeFi has begun to play a role in the allocation of capital to the global economy. If you accept that banks, T-bills and bonds are useful to the world economy, you may now have to accept that DeFi is useful.
Till Wendler also agrees that several leading DeFi protocols are now seeking exposure to real assets, citing cases of business-to-business lenders leveraging DeFi to invest in businesses offering real services, such as Fairmint.
“We’ve seen some momentum in crypto lending. The industry is slowly but surely moving towards real-world results, and that’s exactly where it should be heading if it wants healthy returns and services,” he said.
According to Naureen Mustafa, Head of Exchange Development at LiskDeFi has begun to transform the real estate, insurance and crowdfunding industries, as well as other sectors.
“For example, DeFi eliminates the need for paperwork and all intermediaries in the real estate industry. You can now buy property tokens or even the entire property just by signing a transaction through your digital wallet and can become the owner of an asset without involving banks, real estate agents or public agencies, etc.,’ she said Cryptonews.com.
A recent example of the merging of DeFi and real estate includes the partnership announced in June between Counter protocol and Tower Fund Capitalwhich will see depositors with Teller receive interest payments for mortgage financing and loans granted by Tower Fund Capital.
Sure, such partnerships represent initial steps, but they show that DeFi is expanding, and that it’s not destined to be little more than a leveraging mechanism for crypto speculation.
“While speculative lending and borrowing applications have seen the fastest adoption rates, the entire DeFi sector is in its infancy and I strongly believe it will expand to include corporate finance, real estate, content production and distribution and more,” said Mattias Tengblad , CEO and co-founder of blockchain-based crowdfunding platform Corite.
Many others agree that it is still very early days for DeFi and that the recent crises suffered from the likes of Terra and Celsius will only help it mature. As Naureen Mustafa concludes, there is innovation at every level of the sector, from basic blockchain protocols to decentralized apps to front-end user experiences.
She said: “It has passed the threshold of speculation and investment. Serious use cases are currently being developed, and DeFi services are more transparent, powerful and technologically advanced than a centralized financial system.”
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