With the recent volatility in the values of certain DeFi governance tokens, DeFi has once again risen to the top of the cryptosphere’s global conversation: as excitement around some of these platforms grows, some analysts on crypto twitter have even begun to utter the “b” word in discussions around DeFi platforms. (It’s ‘bubble.’ Why–what were you thinking of?)
While the DeFi hype may not have reached ‘bubble’ status as of yet, it’s important to acknowledge whether or not that’s the direction we could be heading in: is the hype around DeFi warranted?
Specifically, are DeFi platforms secure and accessible enough to support onboarding large amounts of users who may not be crypto-literate, or may have a low level of general financial literacy? Or is the sheer aestheticism of DeFi enough to warrant such excitement?
On Tuesday, July 7th, Finance Magnates met with MyEtherWallet COO Brian Norton, Celsius founder Alex Mashinsky, Binance UK Director Teana Baker-Taylor, and ConsenSys CMO Lex Sokolin to discuss DeFi: its growth, its strengths, and the challenges that lie ahead.
Alex Mashinsky: DeFi Needs “A Better Use Case”
“The race between all the DeFi platforms has to do with who delivers the most back to the community,” Alex Mashinsky explained. You have a lot of new protocols that still have holes in them; we saw that in the March ‘Flash Crash’ and since then.”
Therefore, “we need more maturity” in the DeFi space, he explained, adding that “we also need a much better use case.”
Specifically, Alex said that he thinks “it’s great to see Compound kind of throwing COMP at everybody and bringing a lot of users to be aware of the capabilities–but this is not creating value for the community,” he said. Rather, “it’s just recycling assets” that already exist in the ecosystem.
Alex also noted that as it currently stands, the DeFi world still needs to “anchor” itself into the CeFi world in order to stabilize.
“All of these DeFi platforms have also some added some CeFi to themselves,” he said. For example, “Compound added Tether (USDT) and Maker added [Circle’s USD Coin (USDC)] as ‘anchors’ in the centralized world to stabilize their coins and tokens.”
“But basically, all of us–the entire community–is competing for dollars from the fiat world. We’re competing for dollars from Bank of America, from Wells Fargo, from Deutsche Bank, and so on. So, the challenge is not really how many coins we are recycling inside the community, but rather, how many new people have we onboarded (first-timers), and how many of these people have moved their assets from the fiat world.”
Alex added that for “all these guys that are not-your-keys-not-your-bitcoin people, who basically say that DeFi has to be ‘pure’ and stay disconnected from the finance world: if you don’t build bridges to the current financial system, then you’re not going to onboard hundreds of millions of people.”
He pointed to Celsius, his own company as an example–”Celsius right now pays 87 times more in interest than the average bank,” he said. However, “…the issue is trust: can you convince people to trust this new environment?”
Alex believes that therefore, building connections to the traditional financial world–and thereby, trust with users–is the key to growing the DeFi ecosystem.
Therefore, the question for companies, Alex believes, is “who are you focused on?”
“Are you focused on onboarding new customers…or are you focused on just enabling the cycles inside the [existing] community?”
Brian Norton: users have to consider the fact that “being my own bank” means that they’re “taking on protocol risk”
MyEtherWallet’s Brian Norton pointed out that while creating more onramps into the DeFi ecosystem is important for growth, it’s also essential to understand the risks that users may be facing when they are considering moving their assets into DeFi systems.
“I feel like where we’re falling short is that the appetite for risk–for taking on an entirely new asset class, and a new technology (for most people)–is still relatively low.”
“When you look at these interest rates in DeFi,” he said, referring to platforms that offer high rates of return in exchange for storing assets on them, and DeFi-powered loans, “it’s easy to get very, very excited; but when you think about what that interest might imply–if you really think about it as a user,” then the promises that DeFi platforms have to offer may lose some of their luster.
For example, from their point of view, users have to consider the fact that “being my own bank” means that they’re “taking on protocol risk”–in fact, “I’m taking on principal risk, because I’m the bank.”
“When you put it in that context, you see still how far we have to go in order to attract those users who maybe are less tech-savvy or less financially literate.”
Brian pointed out later in the discussion that as it currently stands, “people do not go into their bank accounts looking to see how much interest that they’ve been able to rake in; for the vast majority of people on earth, a bank account serves as their access point into the financial world–and that’s it.”
“It’s a budgeting tool,” he said. “…The expectation [for earning] is zero.”
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Therefore, creating access to a baseline level of financial literacy–access to information as well as products and services–is essential for building trust: “[on a fundamental level], most people have not really thought critically about what money even is.”
“So, when you take the thing that they’ve identified as being money for their entire lives and say, ‘no, use this as money’–it’s not even a matter of articulation,” he said; are people really going to “watch this video and trust us–this group of people in branded t-shirts–telling you, ‘look, your bank account is not going to make you any money. We’re going to make you money.’”
“I think that’s a very difficult thing [to overcome],” he said.
Lex Sokolin: DeFi is “literally a platform shift in how financial products are manufactured. Full stop. End of story.”
Lex Sokolin pointed out that while onboarding users is important, keeping the bigger picture of what the inception of DeFi means for the future of financial systems is essential.
“People want analogies and comparisons,” he said. “You could say that, ‘look, in September of last year, it was 20,000 people using decentralized finance, now it’s 200,000 people’; maybe that’s exponential and pretty fantastic. You can say that ‘Ethereum has 100 million addresses’; maybe that’s fantastic as well.”
“You could say that Ethereum has three times the transactions of any other public chain; it’s got about $2 billion in stablecoins moving around, I believe, per month.”
However, Lex believes that these facts and figures, while they may be impressive, are missing the point: “you can point to all these things–and they’re good things–but they’re just charts going up and to the right; they’re not really describing what’s happening.”
What is happening?
“This isn’t like Revolut or Robinhood–this isn’t like, ‘oh cool, you’ve got an app, let’s put some assets in it,’” he said. “This is literally a platform shift in how financial products are manufactured. Full stop. End of story.”
“[It’s] entirely orthogonal and different to the core banking systems, portfolio management systems, and underwriting systems that we’ve had for the last forty years.”
“It’s on entirely different logic and infrastructure,” he said. “And we’ve had this magical moment over the last six months where you have, essentially, these programmable vending machines of loans, of margin trading, of book building and market making; of insurance: all of these things being turned on and integrated, and starting to create some really bizarre and interesting outcomes.”
For example, “never before have the same rails been used for payments, and trading, and private equity, and all these other things.”
Therefore, “yeah, we definitely want to have big onramps into this thing–but the fact that this thing is so alien and interesting and new, and the fact that it has these protocol risks and all of these exposures: that’s the reason to get into the ecosystem…it’s the only reason to move over,” he said. “We should acknowledge how aesthetically interesting and beautiful this thing is.”
However, this means that there hasn’t necessarily been a big pull toward investing in DeFi: “in the research we’ve done at Consensys, we see a very long tail of people putting the alternative part of the alternative part of the alternative apart of their portfolio into this, so the average accounts are fairly small; people are ‘testing the water’ for this ‘alien technology.’”
Teana Baker-Taylor: DeFi’s real use case is “decentralizing and increasing access for people to create and generate wealth for themselves”
Teana Baker-Taylor also pushed into the concept of technological development on DeFi platforms, and what the ramifications of building an entirely new financial system are.
Teana specifically spoke about the fact that a great deal of complex financial products and services are being built on DeFi rails: “I do think it’s exciting that we can create these things in an entirely new way,” she said.
However, “coming from a traditional finance background…but–the people who are creating these sophisticated products: do they have the skill set and the background to be creating these sophisticated products that are then being sold to people?”
Later in the discussion, Teana also made the point that the fact that the explanation of the technological DeFi systems is often problematic: that the “nobody knows how an email really gets sent either” narrative can lead to misunderstandings, mistrust, and even capital loss.
When it comes to the idea that “‘we don’t need to know how the sausage is made’–for many, many things, I completely ascribe to that,” she said. “However, when it comes to money–or people’s ability to buy food, or support their children, and pay their rent–I think they do need to understand how the sausage is made.”
Teana also questioned whether or not the cohort of people that is currently responsible for building DeFi platforms has a solid understanding of the financial struggles that some of their lower-wealth, lower-income users are facing.
“The cohort of people that are involved in DeFi today [likely has] disposable income…and may be quite happy to ‘test the waters’, like any early adopter,” she said.
“However, I think the real use-case here around decentralizing and increasing access for people to create and generate wealth for themselves: the upside for [low-wealth users] is really where the value proposition sits.”
Therefore, DeFi systems–when the time comes–could develop profound relationships with these users: “removing those three or four or ten layers between the issuer and the consumer, so that you don’t have financial advisors taking two and ten off the top, or whatever–I think that’s where the rubber meets the road.”
“…If we’re going to create some really complex, sophisticated products, then let’s ensure that people know what they’re buying and know how to use it, and know how to benefit from it–I think that’s where adoption is going to come from.”