Promises of financial freedom, transparency, accessibility and security. The highest of all bars set. An era of global financial interoperability – borderless, cheap, instant and perfectly automated. Humans dis-intermediated and utopia achieved. New benevolent gods of finance born. All of this and more is promised by DeFi evangelists. Lofty goals, indeed.
If only this MVP had been described a little more accurately. Perhaps, calling it “a collection of new financial and technological services, products and systems, that may or may not work exactly as described, built by a cross section of individuals, with varying degrees of honesty, integrity and expertise” would help us make sense of it all.
For both cheerleaders and naysayers, the past few years have been a rollercoaster. Fortunes are being made and lost. Crypto empires both centralized and decentralized rise and fall. Those that remain strive to survive, stay relevant and thrive. But what’s the secret sauce of DeFi (decentralized finance) success? How to move past the hype? Can DeFi grow up? There may not be a golden bullet, but below are some guard rails that can serve as a guide, or at the least, basis for debate…
DeFi platforms must be proven to operate securely and with open integrity to
earn trust. Internal audit and reporting services should be baked in as
standard. Proof of reserves alone is not enough. Proof of solvency and client
safeguarding are the minimum requirements. Platforms should also be subject to
regular independent third party audits to ensure operation in a financially
sound manner. Robust risk management frameworks should be implemented to
identify and help mitigate DeFi risks.
Usability
BIP’s and EIP’s alone do not make an industry. Changing to a use case-centered approach is critical. Problems, opportunities and use cases should be
prioritized. Excellence in UX/UI channel design should be sought to maximize
usability and accessibility. User assistance should always be available, including clear documentation, tutorials and training in localized languages.
Scalability
Platforms must securely scale to meet user problems, needs and un-tapped
opportunities. Desired end-user and platform outcomes are the inputs that help
steer technological requirements. Whether the newest layer one protocol, token
standard or roll up method is used directly relates to the underlying security,
performance and end-user experience being sought. Technological scalability
must also be matched with operational scalability, whether automated or human, across compliance, financial operations and customer support to ensure capacity
that enables safe and secure user growth.
Co-operation
and Collaboration
DeFi, CeFi (centralized, or traditional finance), governments and regulators should work together to create a
financial system that is more efficient, accessible, and resilient. DeFi
platforms can leverage CeFi expertise in AML, risk management, compliance and
more. CeFi institutions can learn from the cool kids on the block (pun
intended). Industry forums and working groups should welcome all to enable
cross institutional stakeholders to meet and discuss common challenges and
develop solutions that move towards standardization.
Regulations
As DeFi grows, so too will the need for regulatory compliance, a key
component in protecting consumers and maintaining the integrity of the financial system.
Mitigations must be put in place to prevent loss of funds and appropriate
transaction monitoring and user management must be implemented to prevent illicit
uses of funds. If developed with the industry, regulations can help provide
direction for common standards, ultimately making CeFi and DeFi more
interoperable.
Intermediaries
DeFi may, in a distant future eliminate the need for intermediaries. Until perfection in
security and code is reached, if this is even possible, intermediaries will continue to be needed. In
an interoperable CeFi/DeFi world, intermediaries will provide valuable services
like dispute resolution, elevated security monitoring and fraud prevention. Intermediaries
will also serve as experts in the field, helping users to navigate the complex
world of DeFi and to choose the right products and services for their needs.
The opportunity to iterate a new financial system is here. Knowledge,
learning and adherence to commonly agreed principles will help shape our world
for the better. Perhaps if SBF had read a book (or ten…) FTX would have been
a roaring success. Alas, this was not to be. If there was a third guarantee
in life, over and above death and taxes, it would be the propensity for humans
to make mistakes. Mistakes tend to present challenges. Challenges become
opportunities for growth. The good news is that DeFi continues to overcome its challenges
and all signs point to forthcoming success, but let’s not get ahead of
ourselves yet. Baby steps…
Promises of financial freedom, transparency, accessibility and security. The highest of all bars set. An era of global financial interoperability – borderless, cheap, instant and perfectly automated. Humans dis-intermediated and utopia achieved. New benevolent gods of finance born. All of this and more is promised by DeFi evangelists. Lofty goals, indeed.
If only this MVP had been described a little more accurately. Perhaps, calling it “a collection of new financial and technological services, products and systems, that may or may not work exactly as described, built by a cross section of individuals, with varying degrees of honesty, integrity and expertise” would help us make sense of it all.
For both cheerleaders and naysayers, the past few years have been a rollercoaster. Fortunes are being made and lost. Crypto empires both centralized and decentralized rise and fall. Those that remain strive to survive, stay relevant and thrive. But what’s the secret sauce of DeFi (decentralized finance) success? How to move past the hype? Can DeFi grow up? There may not be a golden bullet, but below are some guard rails that can serve as a guide, or at the least, basis for debate…
DeFi platforms must be proven to operate securely and with open integrity to
earn trust. Internal audit and reporting services should be baked in as
standard. Proof of reserves alone is not enough. Proof of solvency and client
safeguarding are the minimum requirements. Platforms should also be subject to
regular independent third party audits to ensure operation in a financially
sound manner. Robust risk management frameworks should be implemented to
identify and help mitigate DeFi risks.
Usability
BIP’s and EIP’s alone do not make an industry. Changing to a use case-centered approach is critical. Problems, opportunities and use cases should be
prioritized. Excellence in UX/UI channel design should be sought to maximize
usability and accessibility. User assistance should always be available, including clear documentation, tutorials and training in localized languages.
Scalability
Platforms must securely scale to meet user problems, needs and un-tapped
opportunities. Desired end-user and platform outcomes are the inputs that help
steer technological requirements. Whether the newest layer one protocol, token
standard or roll up method is used directly relates to the underlying security,
performance and end-user experience being sought. Technological scalability
must also be matched with operational scalability, whether automated or human, across compliance, financial operations and customer support to ensure capacity
that enables safe and secure user growth.
Co-operation
and Collaboration
DeFi, CeFi (centralized, or traditional finance), governments and regulators should work together to create a
financial system that is more efficient, accessible, and resilient. DeFi
platforms can leverage CeFi expertise in AML, risk management, compliance and
more. CeFi institutions can learn from the cool kids on the block (pun
intended). Industry forums and working groups should welcome all to enable
cross institutional stakeholders to meet and discuss common challenges and
develop solutions that move towards standardization.
Regulations
As DeFi grows, so too will the need for regulatory compliance, a key
component in protecting consumers and maintaining the integrity of the financial system.
Mitigations must be put in place to prevent loss of funds and appropriate
transaction monitoring and user management must be implemented to prevent illicit
uses of funds. If developed with the industry, regulations can help provide
direction for common standards, ultimately making CeFi and DeFi more
interoperable.
Intermediaries
DeFi may, in a distant future eliminate the need for intermediaries. Until perfection in
security and code is reached, if this is even possible, intermediaries will continue to be needed. In
an interoperable CeFi/DeFi world, intermediaries will provide valuable services
like dispute resolution, elevated security monitoring and fraud prevention. Intermediaries
will also serve as experts in the field, helping users to navigate the complex
world of DeFi and to choose the right products and services for their needs.
The opportunity to iterate a new financial system is here. Knowledge,
learning and adherence to commonly agreed principles will help shape our world
for the better. Perhaps if SBF had read a book (or ten…) FTX would have been
a roaring success. Alas, this was not to be. If there was a third guarantee
in life, over and above death and taxes, it would be the propensity for humans
to make mistakes. Mistakes tend to present challenges. Challenges become
opportunities for growth. The good news is that DeFi continues to overcome its challenges
and all signs point to forthcoming success, but let’s not get ahead of
ourselves yet. Baby steps…
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