DeFi Goes Mainstream


Since May 2020, DefFi platforms such as Maker, Compound, Uniswap and Aave has grown from under $1 billion to $88 billion assets locked at its peak.

DeFi apps are positioned to unlock large amounts liquidity across the globe, lower barriers to entry, eliminate counter-party risk, increase market efficiencies, provide real-time transparent data,ensure fair access to wealth and catalyze massive innovation in the financial space.

So will all these benefits, why hasn’t DeFi gone mainstream? 

In large part, it already has with founders building DeFi applications on almost every applicable industry and total stored assets reaching over $100 billion in early 2021. However, these projects have yet to gain widespread public adoption, here’s why…

What’s Stopping DeFi from Going Mainstream

High-friction Scaling

The most backend infrastructure for DeFi, Ethereum has run into scaling issues over the past couple years and the project must continue to scale in order to support higher bandwidth demands. Processing approximately 1.5 million unique transactions per day, Ethereum is already at its current max capacity, and transaction fees have spiked as a result.

Solana vs Ethereum vs Binance Smart Chain vs Polkadot vs Cardano vs Tron (source: u/DesignBlock)

However, scaling must not come at the expense of security and decentralization. After years of deep R&D, multiple scaling solutions are now live including Solana and Cardano, promising to alleviate Ethereum’s burden while maintaining its core value set. Scaling will likely always be a fairly slow process, with new innovative solutions surfacing to meet growing demands.

Complex onboarding

The DeFi onboarding experience is still too overwhelming for the average mom and pop user. The process of moving fiat money (USD) into the crypto economy remains quite complex and is limited to specific geographic regions. 

Even after some fiat has been transformed into crypto assets, custody and wallet management can be intimidating: Many “wallets” must be installed to interact directly with the Ethereum network and require users to learn new cryptographic workflows such as private keys and seed phrases — without the comfort of “forgot your password?” backups. 

However, the industry is already trending towards best practices on the custody and wallet front: For instance, “smart wallet” Argent avoids seed phrases entirely and provides users with both daily spending limits and a seamless “social” means of recovery in the event that devices are misplaced. 

Unclear regulatory framework

Global regulators have a lot on their plate as technology upends new markets. 

Blockchain technology is an area that the traditional financial world, let alone regulators, overlooked or dismissed for years. Recently, those regulators have been forced to take action. They state their mission is to ensure sufficient transparency for users and law enforcement, to target fraudulent behavior, and to protect freedom of expression and privacy for consumers.

However’s the SEC’s recent reaction to Coinbase’s new token interest program has put their motives into question.

There have been regulatory proposals that misunderstand DeFi and that would impose liability and burdens far beyond current law, and on largely uninvolved software developers. These proposals are like trying to hold the inventor of HTTP responsible for every illegal website.

Fake decentralization

Some emerging chains are practically centralized, betting that users focus on speed and low fees — while sacrificing the permission-less, neutral, and immutable guarantees that sit at the heart of the DeFi value proposition. 

It‘s quite easy to imagine a future where some traditional financial institutions like commercial banks, major tech companies adopt misleading centralized blockchains instead of figuring out how to adopt to DeFi. And while these offerings may unlock some efficiency gains, they won’t meet the full potential this technology promises to offer.

Polygons promises speed but compromises Ethereum’s inherent security (source)

SourcesDecentralized Finance: What It Is, Why It Matters – Future
There’s been a lot of hype, buzz, skepticism, confusion, and excitement around decentralized finance aka “DeFi,” the…future.a16z.com

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