Mariano Di Pietrantonio is the Head of Strategy at MakerGrowth, a core unit of MakerDAO, the lending platform that manages the DAI stablecoin.
This crypto winter needs no introduction. Many within crypto are thoroughly preoccupied with thoughts of Sam Bankman Fried, the one-time face of the industry now sitting in a jail cell. Collectively, the crypto space is questioning what we believe to be true about our own industry, whether we can really judge a success story, and how this can be prevented from happening again.
The impact of recent events on the perception of crypto has been dire, and made worse by the fact that this low follows a period of high, in which novice retail investors were empowered to join the burgeoning field of crypto. Now, skepticism is affecting even the most reputable centralized crypto projects. Companies that have never been doubted before must show ‘proof of reserves’ and radically increase their transparency to survive.
The crypto finance space is currently very far from winning public trust. While good ideas and intentions exist, there is little guarantee that they will not be corrupted and exploited.
With that in mind, the praise that DeFi (decentralized finance) is receiving from some quarters is to be expected. Removing the centralized component of crypto finance and instead providing trustlessness via decentralized protocols and code, systems of community voting, and built-in transparency for decision-making and assets under management has an understandable appeal.
While the centralized crypto world is talking about ‘auditing’ as though the concept is new, DeFi has been humbly putting such ideals into action for nearly a decade.
Far away from the hype, the celebrity endorsements, and the hero worship of the past year, DeFi has been quietly building a better financial world — and it will continue to build through what comes next.
DeFi’s ongoing appeal
Despite having had our own bulls and bears — for example, the DeFi summer of 2020 and apparent DeFi winter of 2022 — DeFi’s tangible capabilities have continued to grow. Mainstream financial institutions and large enterprises, such as Tesla, Monetalis, and Huntingdon Valley Bank, have adopted DeFi for real-world problem-solving. Through the extremities of 2022, MakerDAO’s decentralized community quietly managed a portfolio of over $7 billion in AUM (assets under management), increasing and decreasing this number in sustainable, sensible responses to market events.
The removal of centralized intermediaries from the financial process is something that those of us in DeFi knew would be the most important factor to watch in the long term. Fundamentally, crypto’s value is derived from the immutability of blockchain as a database. Decentralization, transparency, and community action are inherent parts of this world.
Even regulation, which certainly has its place in the future of finance, cannot replace the need for trustlessness enshrined in code. Regulation alone cannot ensure a lack of corruption; a fact that is true outside of crypto, too. We can look to examples of corrupt corporate entities that kept secrets from regulators as proof of this — Enron and Theranos come to mind immediately. It’s also worth remembering that Enron, much like the leadership of FTX, campaigned for more regulation in its field.
While regulation provides a means to hold guilty parties accountable, it does not always deter bad actors. That goal requires decentralization from the outset.
DeFi provides essential liquidity
A crucial fact, understood by those in DeFi, is that using market capitalization as an indicator of the value of a company or token is misguided. The last bull cycle relied on market capitalization to judge the apparently booming health of certain crypto exchanges and other centralized entities.
But, much like Googling the net worth of a public figure, this can be misleading. What matters is not the overall net worth or market cap, but rather the liquidity of the assets.
DeFi protocols can be used to provide liquidity to the rest of the market, further proving their integral contribution. MakerDAO provides liquidity for lending and borrowing in crypto, while other DeFi protocols provide liquidity pools to allow users to lock crypto assets into smart contracts, providing liquidity for decentralized exchanges (DEXes). A more liquid market is associated with less risk, meaning a safer environment for users.
On a mission to build
Looking ahead into 2023, the DeFi space will build on this value to improve service offerings. Until now, CeFi has been a simple access point for newcomers to crypto thanks to its easy-to-use apps, fun incentives, brand endorsements, and reliance on centralized teams to take care of the details. DeFi has a tendency to require more research on the part of its users, particularly in a DAO (decentralized autonomous organization) where token holders vote on the direction of a project. The fact that due diligence, reporting, and decision making is not absorbed by a centralized entity naturally makes DeFi services more complex.
Improving the UX (user experience) and UI (user interface) of DeFi’s many functions will allow us to open up the future of finance to new audiences and achieve the universal goal of financial inclusion.
Beyond this, for many projects, the road to full decentralization is incomplete. The events of this year have added new momentum for more projects in our industry to open up community voting, and record transactions and decisions on-chain.
The roadmap for many projects to decentralize will be sped up in 2023, with DeFi developers already busy making these plans a reality.
This radical movement toward transparency, accountability, and community action will drive forward DeFi’s agenda and, ultimately, will help us to leave centralized corruption in the past. Right now, developers at the center of this movement are determined to further increase their valuable output. Instead of allowing the crypto space to play to the whims of spectators and the actions of a corrupt few, following DeFi’s lead will ensure we emerge from the bear market as winners in the long term.
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