Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

The Pillars of DeFi, 2020: A Series

DeFi proffers the next rewrite of financial services, potentially the greatest since the financial institution. What changes are here, and what are coming?



November 19, 2020

This blog is part of a five part series on developments in DeFi and the different areas emerging. For more in depth analysis now, download our report, "Decentralised Finance: Usecases & Risks for Mass Adoption".

Finance is reinvented every few years, or so it seems. Markets soar and crash, new products gain popularity and risk spreads, consumers demand more from strategies and tools. But, among all the trends across finance, ever since Giovanni Medici opened his doors or that famous meeting at Jekyll Island, there has remained a single constant: the financial institution. Whether a bank, a thrift, or a money services business, someone sat in the middle of your money and where it is going or being held. 

The emergence of blockchain protocols have facilitated new possibilities in the world of financial relationships. Intermediaries are cast aside for self-executing code. Exchange liquidity is mined or farmed in decentralised pools. Private keys are bank accounts, and uncollateralized loans can be accessed in a flash. This is the world of DeFi, or decentralised finance, and its impact on the global financial system is just taking shape. 

But, while assets locked in DeFi protocols have ballooned to $13.6 billion this year, it is still in its infancy. Hacks demand that investors be vigilant and perform extensive due diligence, lack of regulation make it difficult for projects to whitelist themselves, and while institutions are interested, their involvement is still blocked by legal concerns.

But, the possibilities that have arisen continue to draw attention. Previously unthinkable investments are possible in the form of flash loans and new governance models ask investors to think about their philosophies and how they want services to work. These changes call into question the core of how finances have operated for centuries. 

The capabilities of DeFi, lack of gatekeepers, and high interest rates will continue to draw attention. And, as problems arise, so have solutions, with more and better insurance options and smart contract auditors. But, with increasing warnings surfacing about the formulation of a bubble rising, external fixes may be necessary.

The question remains in how these changes will impact the decentralisation of DeFi and who will ultimately drive them - movers in the community now, or external regulators and forces?

As of now, this sector has been an experiment. A highly lucrative and innovative experiment, but one that needs to be refined to determine which aspects should remain, how it will be either enveloped into or replace existing finance, and how to open these services up to a broader audience. 

What’s Next?

To move beyond this development phase, changes are imminent. Not all of these changes will be equally welcomed, but they are necessary for DeFi to continue to last and grow.

With the announcement of the proposed EU regulations on MiCA, or Markets in Crypto-Assets, many are worried. But, this also addresses some issues for projects wanting to be whitelisted.

Further, centralisation is already occurring in various projects. While on one hand, this faces a high degree of criticism, on the other hand, the ease of use means that these projects are a huge driver of the growth of DeFi. The benefits of decentralisation - removing gatekeepers, middlemen, and censorship risks - will have to be weighed against its determinants - low-usability and accessibility.

Some feel that DeFi may evolve to be a centralised replica of traditional finance with more automation. But, with a glimpse at the possibilities that we’ve been given over the past year and a half and the potential for even more, this would be a let down.

Developments in DeFi are far from over, and while the struggle between staying highly innovative and moving to more mainstream audiences are definitely cropping up, we want to take a moment to delve more indepthe into certain areas of DeFi to see what’s happened, where they are going, and what might be next. 

Where to Look

In this series we will cover some of the biggest trends in DeFi. We will take a close look at how insurance products are protecting consumers from smart contract failures and how DeFi looks at risk. We will dive into the world of flash loans and lending protocols to analyse how DeFi veterans have mastered the markets. Additionally, we will highlight a topic at the core of DeFi -- governance. How do these decentralised entities operate, who runs them, and how do they function. Lastly, we will explore some of the unfulfilled promises of DeFi, specifically decentralised identity and what a function DID layer would mean for DeFi systems. 

In it’s as of yet brief life, DeFi opened up financial services in a host of new ways, removing the very institution and providing previously unthinkable services and governance models. Keeping up with all of these changes, the impact they are having, and the impact they could have is a difficult task, but one that we hope to make a little easier with this series.

Reid is the Managing Director at dGen. Previously, he worked at advisory firm FS Vector, where he led regulatory and public affairs engagements for FinTech, blockchain, and digital currency companies. Prior to that, he was Chief of Staff at New York public relations firm, Wachsman, where he led strategy and partnerships. Reid began his career in politics and previously worked for the Democratic National Committee (DNC).