DeFi – Challenging The Incumbents For A Fairer Financial Ecosystem


By Josh Rogers, CEO and Founder of Minterest

Not too long ago, only two distinct types of crypto investors existed – hodlers and traders. Traders who chose to ride the volatility train to extract profit, and hodlers who built and held a portfolio, intending to see their investment grow over the long-term.

There is no right or wrong approach; both have the potential to lose or make money. The issue is not which strategy is best but rather, how to leverage the strategy that has been adopted. A trader’s strategy is immediately transparent, they bet on the movement of the market and win or lose with each trade. Hodlers however, may not know the results of their approach for years, given that no one can predict future crypto growth with any real degree of certainty.

Investors with a reluctance to bet on market volatility had no choice but to passively observe as the fortunes of crypto ebbed and flowed – but this is no longer the case. DeFi has changed the game, offering crypto investors the opportunity to earn income on their portfolios, so now they can have their cake and eat it too.

For the uninitiated, a DeFi protocol allows a crypto investor to stake their tokens in order to earn yield while still owning the underlying asset. The yields on DeFi platforms are incredibly attractive when compared to their traditional counterparts. Even sizeable savings accounts with a bank now earn an embarrassing 0.01%. DeFi yields on tokens, whose prices are stable given they are pegged to a currency such as the US dollar, can offer potential returns of 4 to 6% or more.

Investing rules 101 dictate that if your investments don’t earn inflation plus, you are going backwards. No financial professional worth their salt would recommend leaving money in an obviously non-performing asset – yet it is still commonplace for the majority of assets in crypto. Surprisingly, the bulk of global crypto assets sit idle in wallets. This translates into 98% of a roughly $2.5 trillion market, or one tenth of the size of the U.S. economy being stagnant and earning no passive income for investors. DeFi protocols have emerged to address this, and in doing so have grown massively in popularity in an incredibly short period of time.

Over the past year, the DeFi boom has surfaced spectacularly high levels of innovation within the industry, however it is not without limitations. Liquidation models on the most prominent DeFi protocols extract significant fee revenue, now measured in the hundreds of millions, from the general protocol community, rather than redistributing such funds to users.

Egalitarian fairness and inclusivity were core premises on which crypto was founded, however numerous incumbent DeFi protocols act contrary to such founding principles. Such models rely on the protocol’s solvency being dependent on a small group of sophisticated users known as liquidators. Liquidators act in a predatory fashion, buying out under-collateralised loans at steep discounts and extracting value from the protocol for their own benefit at the cost of the general community.

Added to this, notoriously high gas fees disincentivise smaller investors from even participating on Ethereum-based protocols or when they do, such fees may limit the frequency of their participation which may be key to supporting their best interests. These fees, along with opaque liquidation models and complex user interfaces, have culminated in a market which now significantly benefits a small, elite group of well-heeled investors over and above everyone else.

Overcoming the limitations of DeFi is by no means impossible. For crypto to fulfil its promise of being an equitable and fair alternative to the traditional financial system, it must walk its talk by creating an ecosystem that benefits the many over the few.

The siren calls for DeFi to be more equitable does not only have moral implications, it also makes financial sense. Rather than maintaining the current exclusive status quo, a more equitable egalitarian approach will attract more people to both DeFi and crypto. This means more value being created through greater trust and transparency, something which benefits the entire crypto community, and, as a result, drives wider adoption. If crypto is to be a serious alternative to traditional finance, it must commit to the goals upon which it was founded – a fairer more inclusive financial system for all participants.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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