DeFi industry in need of innovation and creativity, experts say
During the Blockchain Life Forum 2024, experts discussed the challenges DeFi is facing.
Is decentralised finance (DeFi) lacking innovation? Blockchain experts think so.
Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. Although it is said to have huge potential, the technology faces challenges such as lack of reliable internet and regulatory barriers. Moreover, experts argue there is also a need for innovation and creativity in the industry.
Is DeFi stuck?
The crypto market is still riding a very succesful wave, yet DeFi still remains a largely unexplored sector, and continues to be viewed with great caution and uncertainty. Over the last few years, the total value locked of DeFi has fluctuated. At the height of crypto and web3 interest in November of 2021, this reached over $100 million, according to DeFiLlama. Today, there’s an estimated $55.95 billion locked in DeFi.
During the Blockchain Life Forum 2024, blockchain, crypto and DeFi experts emphasised the importance of understanding the basics of DeFi and complying with regulations while maintaining its decentralised nature and fostering creativity.
“DeFi does not have a route to market within the crypto landscape”
Balal Khan
“DeFi does not have a route to market within the crypto landscape,” said Balal Khan, Co-Founder of ZKEX. “And there hasn’t been a massive growth in the past year in DeFi. All the all the money has been coming in via ETFs, again, institutions. So DeFi right now is is a tricky situation.”
Barriers to entry
Despite the massive highs seen by cryptocurrencies in the last few months, DeFi has not seen the same level of widespread adoption. When it comes to analysing the reasons why DeFi has not been able to develop a product market fit within the crypto landscape, Luke Dourney, General Manager and VP of Sales EMEA & US at Blockdaemon, points towards regulations, as well as poor user experience (UX) as the main barriers to entry.
“A lot of the larger institutional firms, and even the largest crypto banks have centralised entities that will have some form of regulation that they need to comply with;” Dourney said. “I suppose the pockets of positivity are definitely around staking and being able to utilise that strength, this asset as collateral potentially at the firewall.”
The need for security and trust is often named as one of the main concerns of potential DeFi investors. Regulators often can’t determine who to hold accountable in case of any misconduct and, as such, DeFi projects and users are often forced to operate at their own risk. A similar sense of uncertainty is also experienced by many traditional financial institutions, which are held back by the lack of regulatory clarity.
“Right now, regulators don’t understand smart contracts”
Luke Dourney
Discussing ETFs, the experts pointed out how the US SEC’s approval of Bitcoin ETFs was fundamental for the sector, as it made investing in cryptocurrencies more accessible to mainstream investors. In contrast, DeFi still requires technical knowledge and familiarity with blockchain technology. The lack of user-friendly interfaces that allow people to make transactions in a quick and straightforward manner make it that much unlikely for DeFi to be adopted by a less tech-savvy audience.
The SEC’s landmark decision also meant that many investors were only able to access these ETFs yields through centralised entities and contracts, a situation that doesn’t support the development of DeFi.
“Right now, regulators don’t understand smart contracts,” Dourney added. “The financial institutions don’t want to take that smart contract risk. So it’s a it’s a little bit of a chicken and egg situation, and I don’t see that changing anytime soon.”
Changing courses
DeFi continues to face many challenges, yet it also holds great potential. The technology aims to provide an open and transparent financial infrastructure that allows anyone to participate in financial activities without relying on banks and other traditional intermediaries. Its characteristics are poised to increase financial inclusion and enable new forms of financing for GameFi projects and NFT marketplaces.
Major banks like JPMorgan, Citibank, Morgan Stanley and others have already demonstrated a willingness to integrate blockchain and its decentralised infrastructure into their platforms. Is DeFi the next step?
In Dourney’s view, in order to grow and sustain its value, DeFi adopters should look at the crypto sector and apply some of its learnings.
“I would argue that they needs to look at what business model works in crypto,” he explained. “And by far, the most profitable, easiest way to make money is by having a centralised exchange, Our endgame is actually to mimic the business model. Because CX is very cheap to run.”
“DeFi needs to look at what business models work in crypto”
Luke Dourney
It addition to the costs benefits, using CX has another upside: it is familiar. During the discussion, the experts pointed out that institutions are less likely to implement technologies and protocols that came with a large learning curve.
DeFi has many challenges ahead, most of them related to its position in a sort of “middle ground” between traditional and new forms of finance. Regulations, UX, interoperability, innovation, all of these items will play a part in how the technology develops going forward. However, as Khan said, DeFi is not disappearing any time soon. Instead it is set to become “a long term project”, the impact of which we have yet to fully experience.
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