Decentralized finance, or DeFi, is a rapidly growing sector of the cryptocurrency industry that offers an alternative to traditional financial products and services. DeFi platforms are built on blockchain technology and allow users to trade, borrow, lend, and invest without the need for a centralized intermediaries.
The phrase “If it’s too good to be true, it probably is” should be applied to this recent article, about the recent collapse of the value of cryptocurrencies. The first hint is when the author claims that the failure of Terra, Celsius, and Three Arrows Capital was a “Black Swan” event. It was only a Black Swan event for those that thought the value of crypto couldn’t crash or those that ignored the string of inter-related crypto loans that were issued. Perfect blockchain transparency doesn’t mean people are paying attention to its flaws and typical consumers have no idea about the inter-workings of these DeFi implementations, they are simply drawn to promises of never ending profit – and that’s why regulators are critical to stability. DeFi needs that regulation ASAP:
“There exists a small sector within DeFi, particularly in the lending space, that has shown signs of resilience despite periods of stress. These DeFi protocols have continued to see healthy demand in both lending and borrowing activities of institutions as evidenced by the continued growth in total loan origination. Veterans in the lending space such as AAVE and Compound have also ventured into the lucrative institutional lending space. AAVE introduced AAVE PRO while Compound set up Compound Treasury, targeted at meeting the institutional needs to gain DeFi exposure.
This dose of healthy demand comes amidst traditional financial institutions’ clients demanding greater exposure to DeFi. A 2021 report by Fidelity has shown that 40% of crypto hedge funds and venture capitalists have expressed interest in digital assets due to opportunities to participate in DeFi ecosystems. The biggest reason for interest in digital assets, according to Fidelity, is their high potential upside. Unsurprisingly, the higher risk-adjusted return of DeFi lending protocols makes more investment sense in an inflationary environment.”
Another important component of DeFi solutions is the actual smart contract technology. Mercator has written a viewpoint on smart contracts and creation tools requires to ensure transparency and trust.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group