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When DeFi was a novelty, the crypto world became obsessed with the rapidly growing industry and its many innovations. It was, for a time, DeFi summer.
But with current macroeconomic conditions and regulatory fervor, things have changed. DeFi summer is a distant memory.
On a recent episode of the Empire podcast, Rob Leshner, founder of Compound Labs answered a question about a potential return to glory: What would pull people back into DeFi?
Leshner began with a little background on current conditions: “One of the really big trends that’s happened over the last year is interest rates and trad-fi have eclipsed interest rates and DeFi. One of the symptoms of that is banks like SVB blowing up that just took too much interest risk.”
“The other, Leshner said, “is that you don’t have people trying to grab DeFi interest rates as much as they were before.”
As of now, it’s easier to just grab Treasury Bills as opposed to grabbing DeFi interest rates, he explained. On top of that, recent issues have caused extremely skittish behavior whereby investors are less trusting of any counterparty, even the most credible, he said.
Return of the DeFi
But Leshner said he expects that the benefits of DeFi will pull people back. DeFi stands in contrast to the opacity of the traditional system, he argues, with its virtues having risen to the surface during recent economic calamity. Past disasters in the space, like the FTX fiasco, caused a loss of trust that pointed users toward the ideals of self-custody and transparency, he explained.
“Take their word for it or validate it yourself. If you don’t have to be afraid that you’re being lied to, it’s an incredibly powerful thing.”
Automation is another important feature that gives DeFi massive advantages over CeFi, Leshner claimed. “DeFi works 24/7 autonomously with no real managers or upkeep.”
“Compare that to a CeFi anything. Long term, autonomous smart contracts, just on their own, are going to be seen as a much better tool for implementing financial markets and products than how they are implemented today.”
“The be-your-own-bank notion is great” Zaki Manian, Sommelier co-founder says. “It means people don’t need to put their faith in opaque, centralized institutions,” but he said it’s a non-starter for now, “as people have to take on the complex and demanding work of being their own banks.”
Automation solves this
“Automation is the solution to this problem,” Manian suggested. It allows users to enjoy “the non-custodial, transparent DeFi experience while offloading complexity of earning yield, managing portfolios, and the like to market-adaptive strategies.”
Automation also enables yield generation on stablecoins “that’s competitive with what you can get in Treasury bonds and yields on real financial activity with cryptonative assets.”
“These kinds of yield generation are essential for attracting capital to the space,” Manian insisted, “beyond the more speculative kind that represents most current liquidity.”
“Still, there are needed improvements,” Manian admitted. “Two key hurdles that we’re currently in the process of overcoming are the user experience gap – too much of DeFi is incomprehensible to non-crypto natives – and a gap in the kinds of products offered relative to traditional finance.”
“People want powerful, easy-to-use products.”
“That autonomous nature of it is a huge magnet for developers and markets over time.” The amount of effort that goes into maintaining legacy markets from reconciliation to accounting and so forth is horrendous in comparison, says Leshner.
The final factor that will pull people back to DeFi is its composability, Leshner added. Advances in one area of DeFi benefit the entire ecosystem due to the system’s interoperability. “When you have your own balance in DeFi, you benefit from all improvements to different application platforms in parallel.” It’s a powerful feature that acts as a sort of hidden tailwind, developing a network effect that continuously improves.
People will come back to DeFi in full force, Leshner believes. “The virtues of it are so strong,” he says, that eventually DeFi is going to win. “All of the calamity of late is just reinforcing on that fact and makes me more confident than ever.”