DeFi’s Having A Moment

Max Galka
May 24, 2023

Late last month, I was on a panel during New York Fintech Week for Empire Startups. One of the questions my panel was asked was: “After the turmoil of the past year, is crypto over?” The short answer is no, but I believe the industry is about to go through a radical—and much needed—transformation. 

Since the catastrophic unwinding of FTX and prior to that 3AC, Terra, Voyager, Celsius, the list goes on, the foundation of our ecosystem has made clear that it’s shaky. But I could say that about other areas of the economy right now as well. You’ve got Silicon Valley Bank, Credit Suisse, First Republic, inflation, liquidity issues, again the list goes on. 

What do several of these things have in common? Centralization and human error. The prominent business model of web3, mainly centralized exchanges and lenders like those noted above, were rife with flaws. TradFi had similar flaws with mismanaged risk and systems that buckled as depositors sought their money. As these players proved shakey, there is one segment that has proved resilient throughout the volatility—DeFi. And that’s why I firmly believe the future of crypto and finance more broadly is DeFi. 

The promise of crypto in general, and DeFi in particular, is that we have invented trustless, permissionless, programmable money that makes it possible to envision a world in which humans are exchanging with one another, but the element of centralization and human error is removed. Yes, there are hacks and white hat hackers out there who illuminate vulnerabilities in smart contracts, but with each hack, the ecosystem becomes more resilient and developers know what not to do. You also have no centralized party maintaining control, which helps mitigate certain risks, including the ability to make unilateral actions. Ultimately, the underlying code dictates the rules of the ecosystem. The proof is also in the pudding, as we see trading volumes starting to move away from centralized entities as decentralized exchanges like Uniswap are beginning to outpace their centralized incumbents.

Furthermore, as Ethereum’s EIP 4337 and account abstraction are becoming more mainstream, it’s likely that many millions of new users will be onboarded onto crypto rails over the next few years and further drive the promise of DeFi forward. We’ve also seen layer two solutions like Lightning Network gain more traction. Layer twos have huge potential to make transacting in crypto a reality, and as a result, we’ll see more natural use cases in web3 outside of speculation.

Not your keys, not your coins… aka: because CeFi exchanges hold all of your crypto in a custodial way, people like SBF are able to rip off customers and divert funds for personal use. The fact that DeFi exchanges require you to come with an Externally Owned Account (EOA) wallet (non-custodial), means that you effectively are in charge of your fate as it relates to what you do with your coins.

So in my mind, while these events were all short term negative for crypto, I believe they have substantial long term benefits. In fact, looking at 12 months ahead, all of the different items that I just mentioned look very positive down the road. Would you rather the vulnerabilities be found and fixed early on? Or come to light at a later date when FTX or you name it is a public company? The past twelve months caused a lot of pain and set back broader web3 adoption in the near term, but I see an extremely promising future. 

What else needs to happen to keep moving DeFi more into the mainstream? Regulatory uncertainty is a big one, especially since TradFi is extremely risk sensitive. The other is making blockchain data more accessible and digestible. The blockchain is essentially a giant database that has all the transactions and transparency and info that if available in any traditional market, it would be game over for anyone without that data. The people with access to this data would have unparalleled information to fuel their decisions. However, the current structure of blockchain data makes it very hard to read and interpret, and this has fallen short of its theoretical promise—open, permissionless, and rich transactional data for all. 

At Elementus, we aim to provide the kind of tooling that I had when I was trading insurance products on Wall Street. By using us, they can better navigate the space, quantify the risks, and make blockchain data feel like traditional financial data.

Learn more about what we’re doing and request a demo here!