Source: Adobe Stock / Ivan Kmit
Mariano Di Pietrantonio is Head of Strategy at MakerGrowtha core unit of MakerDAOthe lending platform that manages the DAI stablecoin.
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This crypto winter needs no introduction. Many within crypto are deeply preoccupied with thoughts of Sam Bankman Fried, the one-time face of the industry who is now in a jail cell. Overall, the crypto space is challenging what we believe to be true about our own industry, whether we can truly judge a success story and how to prevent it from happening again.
The impact of recent events on perceptions of crypto has been devastating and was made worse by the fact that this low followed a rally that empowered inexperienced retail investors to join the burgeoning crypto space. Now skepticism affects even the most reputable centralized crypto projects. Companies that have never been challenged before must demonstrate “proof of reserves” and radically increase transparency to survive.
The crypto financial space is currently far from gaining 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 DeFi (decentralized finance) is getting from some quarters is to be expected. Removing the centralized component of crypto funding and instead providing trustlessness through decentralized protocols and code, systems of community voting, and built-in transparency to decision-making and assets under management has an understandable appeal.
While the centralized crypto world talks about “verification” as if the concept were new, DeFi has been humbly implementing such ideals for nearly a decade.
Far from the hype, celebrity endorsements, and 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.
The continued appeal of DeFi
While we’ve had our own bulls and bears — for example, DeFi summer 2020 and apparent DeFi winter 2022 — DeFi’s tangible capabilities have continued to grow. Mainstream financial institutions and large corporations, such as Tesla, monetizationand Huntingdon Valley Bank, have adopted DeFi for real-world problem solving. Through the extremities of 2022, MakerDAOThe decentralized community of quietly managed a portfolio of over $7 billion in AUM (assets under management), increasing or decreasing that number in sustained, sensible responses to market events.
Removing centralized intermediaries from the financial process is something we knew at DeFi would be the most important factor to watch over the long term. Basically, the value of crypto comes from the immutability of the blockchain as a database. Decentralization, transparency and collective action are an integral part of this world.
Even regulation, which certainly has its place in the future of finance, cannot replace the imperative of lack of trust enshrined in the code. Regulation alone cannot prevent corruption; a fact that is also true outside of crypto. As proof of this, we can cite examples of corrupt companies that have kept secrets from regulators — Enron and Theranos come to mind immediately. It is also worth noting that Enron, similar to the leadership of FTXcampaigned for more regulation in his field.
While regulation is a means of holding culprits accountable, it does not always deter bad actors. This goal requires decentralization from the start.
DeFi provides the necessary liquidity
A crucial fact understood by DeFi contributors is that using market cap as an indicator of the value of a company or token is misguided. The last bull cycle relied on market cap to gauge the seemingly booming health of certain crypto exchanges and other centralized entities.
But much like Googling a socialite’s net worth, this can be misleading. It is not the total net worth or the market capitalization that matters, but 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 crypto lending and borrowing, while other DeFi protocols provide liquidity pools that allow users to lock crypto assets in smart contracts, providing liquidity for decentralized exchanges (DEXes). A more liquid market comes with less risk, which means a safer environment for users.
On a mission to build
Looking ahead to 2023, the DeFi space will build on this value to improve service offerings. Until now, CeFi has been an easy entry point for crypto newbies thanks to its user-friendly apps, fun incentives, brand recommendations, and reliance on centralized teams to handle the details. DeFi tends to require more research from its users, especially in a DAO (decentralized autonomous organization) where token holders vote on the direction of a project. Of course, the fact that due diligence, reporting, and decision-making are not handled by a centralized entity adds complexity to DeFi services.
Improving the UX (user experience) and UI (user interface) of DeFi’s many features will allow us to open the future of finance to new audiences and achieve the universal goal of financial inclusion.
In addition, for many projects, the path to full decentralization is incomplete. The events of this year have given new impetus to further projects in our industry to open community voting and record transactions and decisions on-chain.
The roadmap for many decentralization projects will accelerate in 2023 as DeFi developers are already busy making those plans a reality.
This radical move toward transparency, accountability, and community action will drive DeFi’s agenda and ultimately help us move beyond the centralized corruption of the past. Right now, the developers at the heart of this movement are determined to keep increasing their valuable output. Rather than allowing the crypto space to follow the whims of onlookers and the actions of a corrupt few, following DeFi’s lead will ensure that we emerge as winners from the bear market in the long run.
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Learn more:
– New report shows DeFi outperforming traditional funding under market conditions
– A look at the untapped potential of DeFi
– What DeFi offers for crypto speculation beyond lending
– Top 7 decentralized derivatives trading platforms
– Transition from Crypto Winter to Winter Spring: Lessons from the Bear Market and When Winter Ends
– The pros and cons of joining Web2 to Web3
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