The past few years in tech and finance have been rife with buzzwords, crypto scandals and regulatory failures.
Whilst this is an exciting time in tech and an unprecedented time in the financial industry, the word DeFi (decentralised finance – which in essence uses emerging technology to remove third parties and centralised institutions from financial transactions, primarily in the crypto space) has received massive amounts of attention (and investment dollars) yet it remains poorly understood and lacks consumer awareness.
I would respectfully state that people are adopting and putting too much blind trust into the buzzword DeFi without understanding the fundamentals of the industry which is why over the years, individuals and institutions alike have invested heavily in the technology without understanding the benefits or risks.
In principle, DeFi sounds like the ideal solution for an autonomous alternative to our current centralised financial system and central bank currencies, but we have a long way to go before centralised and decentralised currencies can co-exist in a healthy financial ecosystem.
As it currently stands, DeFi is a broken system.
Let’s take the recent FTX collapse for example. FTX is a “DeFi” exchange, which is a financial platform for cryptocurrencies to be bought and sold. While FTX is known as one of the world’s largest exchanges for DeFi currencies, it is ultimately controlled by a single person.
When something is controlled by one person or an organisation of people, this is the antithesis of being decentralised. However, this is exactly the situation that millions of FTX users found themselves in, where billions of their “DeFi” dollars rested in the hands of a single, centralised organisation
This singular organisation (FTX) had complete control over billions of dollars of both retail and institutional investors alike. They allegedly used DeFi funds illegally to fund other companies that they owned or had interests in. Ultimately, the entire FTX exchange collapsed, and billions of dollars were lost.
Once again, the industry’s reputation was tarnished and trust in cryptocurrencies are at an all-time low. In fact roughly $200 billion has been wiped from the global crypto market over the last seven days, due to the downfall of FTX.
Looking at the bigger picture, I feel that this collapse is exactly what the industry needed to wake people up.
A scandal and meltdown like this is a “Rock Bottom” event for the DeFi industry because it demonstrates a critical flaw in the system- it proves that “DeFi” as the world knows it doesn’t actually exist- it’s an illusion.
Just because something is built on blockchain, does not mean that it is decentralised. If one person or organisation can make billions of dollars of DeFi funds evaporate overnight, then “decentralised” currency, as the market currently knows it, is meaningless.
But maybe that’s a good thing. Personally, I believe that DeFi should be renamed DiFi. It’s more accurate to call this new revolution of money as digital finance, not decentralised finance.
Digital finance is the future. It’s happening in India with the RBI (Reserve Bank of India) and the Digital Rupee. It’s happening with the Euro. CBDCs (Central Bank Digital Currency) all around the world are beginning to implement their own version of digital currencies.
So what is the obsession with decentralisation? Does decentralised finance really matter to the average consumer? Is it actually a solution for a more prosperous monetary system for everyone, or just for those who prey on unsuspecting targets, like FTX allegedly did?
As it currently stands, then the decentralised finance industry is a complete disaster.
DeFi has essentially given unchecked power to unethical opportunists and greedy corporations that are looking to make a quick profit, and as such, the industry is built like a house of cards.
If we want mass adoption and a safer, more sustainable ecosystem for both retail and institutional investors in cryptocurrencies, we need adequate (not over the top) regulation in this industry. Period.
Does this mean the end of DeFi? An industry that is still in its inception? Probably not. But we certainly can’t keep going with the way things are.
It will be interesting to see how GCC governments who have been heavily focused on welcoming the cryptocurrency ecosystem to its shores will regulate DeFi moving forward, because DeFi lacks the regulatory frameworks to make it work. We also cannot over engineer the DeFi regulatory environment, because then, what’s the point?
However, I do believe that DeFi is here to stay, but we certainly cannot continue with the way things are. In my view, governments, banks and the DeFi community need to come together and openly discuss regulatory and other issues that are pre-requisites for a viable and prosperous DeFi (or as I would like to call) ‘DiFi’ ecosystem, because I do believe in its ultimate vision and future.
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