A flurry of recent articles have announced the “death” and decay of decentralized finance (DeFi), spurred by recent issues caused by an exploit and a crypto founder with questionable risk management skills. However, this pronouncement may be a measure in overstatement.
The underlying controversy was sparked when the founder of a prominent automated market maker, Curve Finance, lent out almost half of the protocol’s CRV tokens to several DeFi lenders. This action nearly led to liquidation after a somewhat predictable, yet unexpected DeFi exploit drove down the price of CRV.
While some voices, like Daniel Kuhn of CoinDesk, have described DeFi as “dead inside,” and reports like JPMorgan’s argue the sector is in a “shrinking or stalling mode,” a deeper assessment may tell a different story.
The volatile and overpowering DeFi nature as witnessed during the summer of 2020 is thankfully, a thing of the past. This period was characterized by excessive liquidity, “yield farming,” and talk of yield. However, few market leaders emerged, adopting professional “white glove” services for growth.
Does DeFi have room for improvement? Undoubtedly. As noted by Daniel, an undue amount of power rests in too few hands, a striking reminiscence of traditional technologies. Further, financialization of DeFi to the extreme arises as a concern especially when programmers wear the hat of financiers.
DeFi, a still-experimental technology, has seen its share of mistakes. Yet in the exploration and tinkering, we’ve built sturdy systems that defy the traditional confines of corporations, banking rails or even geographical borders. Strong evidence of its potential lies in the fact that financial and corporate stalwarts like Mastercard, Visa, Coca Cola, Anheuser Busch, Nike, Starbucks, BNY Mellon, BlackRock and Fidelity, are dedicating resources to harness its efficiency-enhancing capabilities. Indeed, the road to DeFi becoming mainstream and gaining professional credibility is fraught with challenges which will only multiply as it grows.
While complete decentralization of all financial systems remains a dream, our encounters with the technology help us strive for a power balance between self-executing codes and their human creators. Even when decentralized autonomous organizations (DAO) make strides in inclusion, one cannot overlook human failings that bring us back to the traditional corporate hierarchy.
The compelling growth and maturation of DeFi technology has considerably shifted the power center. Its generalizing nature of offering transparency, efficiency, disintermediation, and self-custody may possibly become the norm across the entire financial system— if traditional banks do not want to lose out to the innovative lending, borrowing, and insurance opportunities that it extends.
In the grand scheme of things, DeFi is far from being dead or dying. While there might be unsettling situations like the Curve episode, the march towards decentralization needs to play out naturally. The market needs to work, and the protocols, teams, and systems need to make necessary adaptations. With early experiments and corporate explorations indicating potential, the trajectory of DeFi is more upward-facing than ever, albeit challenging.
Source: Coindesk
