Remember DeFi Summer, when everyone (and their close relatives) was earning a fortune from blockchain-based financial protocols like yield farms? What about the NFT mania a year later, which pushed trade volumes past $17 billion?
Alas, the DeFi zeppelin flew too close to the sun and suffered an Icarus-like fall. The question is, will the space enjoy a glorious rebirth or represent a cautionary tale for future generations of retail investors seeking easy returns?
Building Back Better
There are arguments to be made for both eventualities. On the one hand, poor regulation and inconsistent safety protocols continue to blight the industry: October was actually the worst month in history for DeFi hacks, with almost $3bn worth of assets stolen from decentralized protocols – nearly double the previous benchmark.
On the other hand, we are increasingly seeing the industry’s key stakeholders grapple with the major questions posed by DeFi’s fall from grace. Namely, instituting a workable regulatory framework that aligns with the philosophy at the industry’s heart (financial self-sovereignty, economic freedom, privacy) while at the same time reducing the risk of fraud.
The slogan Build Back Better may cause a tingling of unease in your spine, but that’s ultimately what DeFi must do. Because when the macro picture brightens, the industry has to be ready to capitalize on the returning feel-good sentiment. Such an outcome will only be possible if it gets its house in order.
Nicholas Kelland, Head of Strategy at DeFi accelerator KREW, is one of many figures working on pulling web3 forward. On lessons learned from the crash, he says: “Irrespective of market conditions and liquidity environments – or lack thereof – we have learned that community and users will always stick with protocols and projects that are actively building. Bear markets are the best time to be heads down, and to be scaling infrastructure. When retail volume does return, those groups who have set themselves up for success in the more barren times will see the most rewards.”
Beavering away at improving infrastructure is all well and good, but what needs to happen to change DeFi for the better? “I think full-service offerings, across a number of protocols attached to one chain, could be a template for business success that may be mirrored down the line. From our perspective, we have taken a chain, Klaytn, with a lot of as yet unrealized retail upside and built a suite of genuinely useful DeFi protocols servicing a wide range of user activity. It’s how we’ve managed to build a community of over 75,000 members and growing.”
Jeremy Musighi, Head of Growth at Balancer Labs, highlights security and ease of use as two areas where DeFi must improve. “Obviously the more DeFi applications become safer and easier to use, the more end users will choose them over centralized products and services.
“This year has been an opportunity to learn a lot of important lessons, particularly in terms of unsustainable and economically unsound protocol designs, Terra being the most apposite example. Although Terra was open-source and transparent, its complexity meant that many people failed to recognize that it was problematic. At Balancer, we provide an infrastructural backbone for the continued growth of the space, allowing new teams entering DeFi to further innovate on open-source code and solve new problems without needing to reinvent the wheel.”
Preparing for a Fresh DeFi Wave
No-one yet knows what the regulatory picture will look like. But a recently leaked draft of the Digital Commodities Consumer Protection Act (DCCPA), which details how the Commodities Futures Trading Commission (CFTC) will govern the DeFi space, offered an insight.
While crypto attorney Gabriel Shapiro suggested the draft could be “a boon to DeFi/crypto,” others had a less charitable interpretation. Richard Chen, a General Partner at crypto investment firm 1confirmation, went so far as to say the bill would give CFTC the power to “kill DeFi.”
Perhaps the best thing to do is reserve judgement until the real bill appears in the wild. And in the meantime, focus on not repeating the same mistakes as those made during DeFi Summer.
Kiril Nikolov handles DeFi Strategy for Nexo, an all-in-one digital asset platform that offers crypto-backed loans. According to Nikolov, the number one lesson the last bull run taught us was to “be paranoid and walk away from ‘easy’ money,” adding that it is something that has become second nature to the Nexo team.
“Additionally, we learned to plan and prepare in advance for the worst-case scenario, by paying attention to protocol design and DeFi dynamics. This year we had a number of long-tail risks appear – 3AC, Celsius, Luna, etc. – and the companies and people who survived were those who had prepared. Honestly, I think a lot of wisdom from TradFi can be applied to DeFi with great success. I would even go further to say that through DeFi, one can become a very sophisticated power user of financial, economic, and technical tools. This also applies to institutions.”
Nikolov points out that Nexo is working on both non-custodial services and protocols, as well as more traditional and familiar products that offer DeFi exposure. “We aim to offer a transition – access to DeFi from a simple interface, while in the background we build the tech stack and infrastructure of tomorrow.”
Intrepid DeFi application builders like Nikolov, Kelland and Musighi don’t shy away from discussing the industry’s failings. And why would they? After all, those who cannot learn from history are doomed to repeat it. Instead of covering up for the sector’s shortcomings, the trio seem laser-focused on improving DeFi tools and systems ahead of the next boom cycle. In so doing, they will provide a template for the next wave of innovative DeFi protocols, projects that provide a better market-fit, a smoother interface, and inbuilt risk management tools.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Read More: news.google.com