In a business school lecture hall at the Massachusetts Institute of Technology (MIT), an executive from Safaricom made predictions about the future of decentralized finance and business for a room of MBA students. “You will be able to buy your first home on WhatsApp! The smart contract on the Ethereum blockchain will handle everything, you don’t need a broker,” he said with confidence, pointing to a slide.
“How will the ownership of the house change hands? What about the funds? Can the blockchain be used for escrow? What is the role of a lawyer? How can we buy something worth a million dollars by clicking a button?” The class wants to know.
Student in April 2017-Haven’t seen Bitcoin (Bitcoin) Over 20,000 USD-there is almost no reason to believe that blockchain will change the world. They are very interested anyway. Although these conversations took place in 2017, for many people today, the same discussions are still fascinating. This is because there are still many individuals and companies that have not yet experienced the impact of DeFi and real world assets (RWA).
Looking forward to where we are in 2021, and beyond DeFi summer excitement And the frustration of Bitcoin’s recent sell-off, we are at another crossroads. DeFi total value locked in is now More than 150 billion US dollars, MakerDAO Has now officially become a DAO, FTX Raised the largest private financing In the field of encryption, the future of DeFi seems more reasonable than ever.
This will be a world where credit, payment, and investment are all carried out on the chain in a decentralized system, and the role of financial institutions is not that big. In the spirit of blockchain and the broader financial technology movement, the DeFi project aims to provide innovative financial products with lower costs, fewer intermediaries, and greater transparency.
Although DeFi has made remarkable progress and breakthroughs since 2017, the liquidity in the DeFi ecosystem represents only a small part of what it takes for decentralized finance to become mainstream by bringing more real-world assets into the chain .
The entire industry faces a question: how do we pull from early customers to product market fit? So when a version of the 2017 conversation between Safaricom executives and MIT students took place today, it wouldn’t sound like something unusual, but more like a part of most people’s daily lives. The following are some of the key determinants of DeFi’s mainstream adoption.
Comprehensive data and analysis infrastructure
As the role of centralized financial institutions (the “guarantors” of the financial system) continues to decline, we have to rethink how data is moved, and how to control and keep it. Without a bank, how would blockchain manage a person’s identity? How will we assess the risk? If we cannot call the centralized data set for valuation, how will we price the asset?
Oracles have successfully played a key role in bridging the gap between real-world data and smart contracts. But what about data analysis tools such as FICO and Bloomberg that power the financial market? We have not seen any oracles that provide viable solutions. The wider DeFi space requires a solution that supports crowdsourcing to price historically opaque and illiquid assets so that we can effectively and efficiently introduce these private assets into DeFi.
In general, this will accelerate the flow of real-world assets on the chain, including real estate and collectibles, and have the power to change the world. Nevertheless, we still raise new questions: What is the correct way to manage data in a decentralized world, and how will the law be applied to a technological environment that legislators have never considered? This problem has plagued the social media industry and its reputation in the past few years. How does DeFi avoid similar pitfalls?
The DeFi ecosystem replicates the complete CeFi functionality
China is a global leader in financial technology innovation. In 2020, the penetration rate of digital wallets is close to 90%, and the number of single transactions will reach 62 billion. By providing wallet holders with a complete banking experience, this textbook definition of mass adoption becomes possible. Through Alipay of Alibaba Group, China’s leading digital wallet, users can buy insurance, invest in mutual funds, exchange currencies, pay bills, and donate to charities. Alipay is a model of a digital revolution, designed to allow people to continue the same daily tasks, but easier, faster, and cheaper.
Similarly, encryption innovation must be built on the DeFi ecosystem, which provides the same security insurance, lending services, and trusted currency. Although many DeFi veterans have implemented RWA-based strategies, the lack of sufficient on-chain RWA has severely hindered the development of the ecosystem.
After having proper pricing infrastructure, DeFi needs to provide a solution to put real-world assets on the chain on a large scale. The unique value proposition lies in their financing license. This field requires an agreement to connect with traditional corporate borrowers around the world to initiate RWA on a large scale and link CeFi’s funding needs with DeFi’s liquidity. This can be achieved by providing a frictionless lending process for real-world borrowers, eliminating the need for “encrypted education” by allowing borrowing and repayment in a legal manner. Most importantly, an RWA-based income strategy must be created to allow DeFi and CeFi lenders to invest in income-generating real-world assets while maintaining exposure to crypto assets.
RWA loans will undoubtedly provide plenty of opportunities for DeFi innovation to replicate most, if not all, CeFi features. As more and more projects focus on RWA, the ecosystem will expand rapidly.
Effective and efficient decentralized governance
When we talk about expanding decentralized finance and introducing more RWA on the chain, decentralized governance is an inevitable part. An effective decentralized governance solution can benefit DeFi in many ways:
- Easier to expand. Organizations interested in scaling up can facilitate this process more easily if they are decentralized.
- Faster decision making. This largely depends on the organization’s governance form. Of course, some may be faster than others, but decentralized organizations have clear advantages over centralized organizations that need to wait for decision-making approval.
- transparency. All types of transactions can be tracked and audited by all permitted parties, thereby increasing transparency and preventing fraud.
Global regulatory compliance standards
In a market where regulatory enforcement actions are unpredictable, DeFi cannot fly blindly.Just last month, the U.S. Securities and Exchange Commission Chairman Gary Gensler said:
“These platforms-whether decentralized or centralized in the financial sector-are implicated in securities laws and must operate within our securities system.”
The DeFi industry needs a compliance strategy. Decentralization makes it difficult to hold any single entity accountable, or worse, the notion that decentralization makes compliance unnecessary has and will continue to arouse the contempt of regulators.
How can the platform reasonably incorporate its business into the existing legal structure of the Bank Secrecy Act and understand your customer (KYC)/anti-money laundering, or at least help to change the paradigm? Although Libra’s misfortune is not DeFi, it represents a missed opportunity to innovate without insulting our authorities. In the current state, the DeFi industry risks insulting regulators and advances the theory put forward by opponents such as Elizabeth Warren that the cryptocurrency industry exists only to promote illegal financial activities, such as money laundering, drugs, and human trafficking. Although the answer to how DeFi will integrate compliance into the technology stack is still unclear, it seems that it must be done. Mainstream institutions and the public need better KYC standards before adopting them.
Some agreements have the potential to improve and protect the global financial system by introducing much-needed transparency and neutrality into a stable currency. Some stablecoin platforms allow anyone to generate peer-to-peer cash in a trustless and decentralized environment.
But if we really hope that everyone can realize the dream of making financial services available to everyone, then those of us in the DeFi field must leave our comfort zone. Our goal is for RWA to incorporate billions of dollars into non-digital natives. We must cross the gap and get out of the collateral to enter the DeFi ecosystem, but we cannot do it alone. We need to cooperate with a whole set of companies and projects with clear goals, while encouraging competition from the traditional financial sector to benefit the most important people-users.
This article is created by David Leighton, Kevin Tseng and Mariano di Pietrantonio.
This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision.
The views, thoughts and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.
David Leighton He is the co-founder of Lithium Finance. He is an entrepreneur who is keen on inclusive financial innovation and the founder of SendFriend, a fintech startup that uses blockchain for international remittances. David also served as a special assistant to the Haitian Office of the World Bank and co-authored the Haitian National Financial Inclusive Strategy. David holds an MBA from the Sloan School of Management of the Massachusetts Institute of Technology and a Bachelor of Arts and Master of Arts with honors from Johns Hopkins University.
Zeng Zhiwei He is the founder of Naos Finance. Before joining Naos, Kevin was a serial entrepreneur and investor. Kevin founded and exited three technology startups in China and Southeast Asia, and led the strategic investments of Disney and Alibaba Group.
Mariano di Pietrantonio He is the strategic leader of MakerGrowth, the core unit of MakerDAO. He is mainly engaged in the development and research of new use cases, including education, partnerships and communication activities. Mariano has 15 years of experience in product and marketing in the pharmaceutical, banking, and gaming industries.