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Three years ago was DeFi’s first golden age. Token prices surged and young builders became millionaires seemingly overnight. Experts predicted transformative potential across sectors from real estate and finance to entertainment.
Cue to today — DeFi is viewed as a shady online space, where criminals take advantage of less-savvy users.
The DC Department of Insurance, Securities and Banking (DISB) has an entire webpage titled “Beware of Decentralized Finance” warning constituents about the risks.
Do Kwon, once coveted by mainstream media, is now referred to as a “trash talking crypto founder” in the New York Times.
When looking at the crash of crypto and DeFi, it is hard not to think about the dot com bubble burst over two decades ago, as both are products of extreme speculation.
Rising interest was in play in both dramas, alongside 80%+ in market cap disastrously evaporated.
The tech industry walked out of the ashes of the dot com burst and orchestrated Web2 glory.
Can our industry do the same to build iconic success for Web3?
Where DeFi fell flat and what it got right
DeFi was built on the bedrock of hype and expectations. Now, projects struggle to generate revenue and hacks proliferate, fueling critics.
We did a lot wrong. Narratives revolved around speculative trading lacking tangible benefits to the real world, and misguided practices like airdrop farming overshadowed lasting value creation.
Anonymous builders were embraced but not held accountable from quick exits and scams, irreparably harming our communities.
Privacy is important, but for building a platform that manages others assets, accountability is essential: and it’s challenging to keep an anonymous entity accountable.
We achieved instant global settlements and traceable cross-border payments, digital milestones that elude our traditional financial system.
Smart contracts excel in transparency and automatic execution.
DeFi primitives like lending protocols and decentralized exchange platforms thrived.
The problem is these novel mechanisms succeeded within DeFi, but DeFi as a whole stayed isolated, held down by continued media focus on hacks, scams and rugs.
How to fix DeFi’s reputation
- Shift our mindset from speculation to value creation
No more poetically waxing grandiose claims that DeFi is the “future of finance.”
Stop equating DeFi to the stock market, which prolongs narratives that blockchain is only useful for financial gains.
And builders — stop solely relying on token incentives and airdrops for acquiring revenue and users.
Every project that relies on these tactics is built on speculation, and will fail when token prices drop and airdrop farmers move to new pastures.
Instead, we should showcase actual value creation and create sustainable business models.
Even this year, there has been incredible work in real value creation, like Jia providing blockchain based micro loans in emerging markets, and Arf achieving cross-border remittance instant settlement.
- Innovate on legal infrastructure
Current regulatory and legal infrastructure is built for traditional finance and does not fit DeFi. At the same time, it is beneficial for humanity to have rules that guard against money laundering and other criminal activities.
Innovation on regulatory and legal infrastructure to leverage the strength of blockchain is key to DeFi’s success. Europe’s adoption of “Markets in Crypto-Assets” (MiCA) is a great step forward.
The idea of Real World Assets (RWAs) is that we can digitize tangible items like receivables and real estate on the blockchain, digitally record ownership, and this allows direct trading or fractional purchases.
This is practical, traceable and shows a juncture where traditional sectors and DeFi can merge.
Mainstream RWA protocols are taking a practical approach to find the right legal structure to be compliant for different asset classes in different jurisdictions, (e.g, treasury bills, receivables, real estate). Over time, more generic structure will emerge.
If we succeed, we can repair DeFi’s damaged reputation, ensure protection and greater participation, attract traditional capital, and establish RWAs as DeFi’s best use case.
- Keep the builders and borrowers accountable
Crypto’s setbacks have eroded investor confidence.
To progress, we must enhance social and technical frameworks, ensuring accountability for builders and borrowers.
Builders must shed anonymity, adopt better security practices and fortify against hacks.
Borrowers lack mature credit infrastructure; until then, legal agreements will anchor accountability for RWA protocols.
Moving forward
Today, many individuals and institutions are handicapped by financial resources available in their jurisdiction.
DeFi is an opportunity for a decentralized financial system that empowers everyone with equal access to global capital.
We can repair DeFi’s reputation by addressing the legal and technical infrastructure required to tokenize RWAs.
Through RWAs, global capital access frees small businesses in Argentina from 114% inflation, accelerates growth for Southeast Asian suppliers, and enables unbanked crypto treasuries to yield through T-bill or other real-world funds.
DeFi has a reputation problem. But lessons from the last cycle can drive RWAs’ adoptions, spurring Web3 innovation while leaving speculation behind.