On september 10th and 11th 2019 took place the very first DeFi Summit at Imperial College London. A conference about decentralised finance with 300+ attendees illustrates how much crypto has matured during the bear market. This time around, there weren’t only dApp builders and researchers, but also lawyers, VCs from crypto and traditional hedge funds, and various professionals from multiple sectors willing to grasp the potential of DeFi and wanting to be a part of it. Coinhouse was here to share what you should remember.
Definition : DeFi – for Decentralised Finance – is a term that doesn’t need any further introduction within the crypto world. Smart-contract enabled applications : permissionless, autonomous, auditable software running on public blockchains such as Ethereum are the building blocks of tomorrow’s financial applications.
What advantages does DeFi have versus broader FinTech solutions and the traditional financial world?
The answer lies in community, openness, accessibility, and composability.
On public blockchain networks, information about how software runs is free and accessible. This differs widely with the traditional space where it can become very expensive to obtain information since corporates want to protect their products as best as they can from competitors, at great costs. In DeFi, the cost of building new financial products can lean towards zero as you’re building products on networks that give economic incentives through cryptocurrency rewards to secure and run a 24/7 infrastructure for applications.
Increasing numbers of smart-contracts are available and ready to be used by whomever wants to build applications, instead of having to reinvent the wheel every time. Thus, the pace of innovation is much greater than in traditional finance and FinTech. According to Rija Javed from MarketInvoice, one of the core tenets of DeFi is removing bureaucracies, which makes it move at a faster pace than closed-source FinTech companies.
In DeFi, the cost of building new financial products can lean towards zero
As an example, Multis, a french company led by Thibaut Sahaghian, has managed to pick and put together a one-stop easy to use interface to manage multiple applications built upon Ethereum including ENS naming protocol, tools like Portis and Metamask, as well as protocols developed by Gnosis, MakerDAO, Compound, Nexus and more. Without ever having to ask permission.
The fact that each of these systems is transparent and auditable helps build trust in them. Of course, the robustness of these protocols shouldn’t be taken for granted. Code is code, and vulnerabilities will be found. A ConsenSys team led by Jack Clancy works on establishing the first trust-scores for smart-contract financial applications, taking into account metrics like openness of the code, number of audits by reputable firms, formal verification, and more.
Let’s keep in mind who needs Decentralised Finance the most
Alejandro Machado from Open Money Initiative and Markus Franke from Celo remind us that we, people of developed and western countries, are not the ones who need those tools the most. 1.7 billion people from around the globe are unbanked. Many more can’t save money, in places such as Argentina or Venezuela. It’s not even about investing, but about meeting daily needs and owning an asset that can be used to store their savings and trade.
The promise of DeFi resonates pretty loud in such countries. The growth of cryptocurrencies is tremendous as local populations slowly learn about it and start using it. While Bitcoin is offering an alternative, censorship resistant, global and transparent financial system, it will lead to a growing interest in more complex DeFi applications.
In Kenya, 40% of the population is under 15 and 36% live with under $2 a day. Yet, 88% own a mobile phone. The promise of DeFi is that unbanked people won’t even have to interact with the traditional system. Their own bank will fit in their pocket and they won’t have to ask permission to use the tools that they need for their daily lives, and help building them.
The promise of DeFi is that unbanked people won’t even have to interact with the traditional system
The mains challenges are education and the fight against scams, which flourish in environments of financial illiteracy.
What about adoption within the traditional financial world?
DeFi is quite young and to this day still resonates only within the crypto-savvy community.
Jean-Marc Bonnefous from Tellurian Capital pointed out to the missing connectivity with the legacy world, and explained that a liquid stablecoin with seamless onramp would help access the world of DeFi more easily. Institutional adoption would also help, mainly by solving the liquidity problem. Adoption of DeFi is still low, $50M were generated as interest in DeFi protocols while $1.5B were generated through Genesis Capital alone, an institutional grade centralised lending service.
According to Lionel Rebido from Trakx, there are still some challenges to overcome for institutional adoption to kick in. Among which institutional grade custody solutions, a clearer regulatory framework, and better user experience… The learning curve for understanding and using crypto-networks being quite steep.
There are still some challenges to overcome for institutional adoption to kick in
There are issues to be solved around scalability, latency, liquidity slippage costs, and concentration on Ethereum and on nodes like Infura. Governance is also a hot topic, with teams at Aragon, Akropolis, DAOstack and many more working towards the adoption of Decentralised Autonomous Organizations. Finally, issues around price feed and oracles are also problematic and being tackled by teams like Chainlink.
On regulation more specifically, teams developing DeFi apps need to adopt a preventive attitude. Lex Solokin and Jack Clancy from ConsenSys made it clear that most DeFi protocols are not fully decentralised despite their current classification and their desire to eventually get there.
If a DeFi protocol cannot survive a government shutdown order, then the teams should figure out a regulatory strategy before it impacts them. The good attitude is going to regulators and helping them understand the technology and build a regulation that’s going to be beneficial for all parties.
On the other side, Eileen Burbridge from Passion Capital thinks regulation is going to be a huge challenge, as regulators are not used to let people take their responsibilities and often act in a patronising manner when it comes to protecting individual investors, which is not compatible with the freedom and personal responsibility given by the use of crypto networks. Luckily, regulators’ interest has taken compared to a few years ago: they clearly want to learn.
Some metrics and insights on the future
Kyber network is an on-chain liquidity provider for decentralised applications. As they are connected to a large number of dApps, the volumes of Kyber Network are a good indication of the growth of DeFi.
While still small, as pointed out earlier, the growth is non-negligible for a nascent industry and isn’t showing signs of slowing down.
As a future catalyst, MakerDAO, the largest pillar of the DeFi landscape, has presented its on-going work towards what will be Multi Collateral Dai. MakerDAO is a decentralised credit system that issues DAI, a stablecoin pegged to the USD through adjustable economic incentives and over-collateralisation with cryptoassets. As of today, only ether can be used as collateral by the system, but Gustav Arentoft from Maker and Lucas Vogelsang from Centrifuge/Tinlake gave insights about the improvements of their collaborations to bring traditional assets to the MakerDAO system.
Through such a system, one will be able to tokenise a mortgaged house through a non-fungible token, use the NFT as collateral to issue a standardised ERC20 token with a fixed value that will be able to be put in a MakerDAO contract to issue DAI. A first Proof-of-Concept transaction has been conducted successfully by the teams. Such advancements give a vision on how DeFi can be linked with the traditional world and are a testimony to DeFi potential in the long run. Off we go.
This article is far from covering everything that happened at the London DeFi Summit and is merely an overview of what the author has collected from talks and networking sessions. Looking forward to the next one !