Is DeFi Sustainable?

The future of DeFi is in question as the yield farming train looks to be in jeopardy. The opportunity that decentralized finance presents to emerging economies could outweigh much of the risk that institutional investors in the field are faced with, allowing for a healthier expansion of open financial infrastructure on the blockchain.

As China rushes to be the first nation to implement a Central Bank Digital Currency, Japan and Canada both appear to be on course to open discussions about CBDCs, while the United States and other major global economies struggle to come to terms with the future of modern finance and shift away from an economic paradigm which many argue has just about run its course.

Emerging economies across Asia and Africa are embracing advancements in fintech and blockchain technology with many countries leapfrogging from antiquated technologies to blockchain adoption in a matter of months.

The ethos of DeFi comes into question more frequently as its future becomes increasingly politicized in the early stages of governance across various emerging decentralized lending platforms.

Compound has come to somewhat of a standstill this week as the community discusses various changes to the protocol which could be voted into action in what is still the infancy of the platform. The integrity of DeFi is being scrutinized as speculation mounts over scams and fraud within the space.

But while these changes may appear to be in the interest of yield farmers and risk takers, the future points towards something much more wholesome and befitting of the nature of open finance.

Whether or not you think DeFi is unsustainable, the opportunity it presents to disrupt the fragile global supply chain network is appealing to the many individuals and small businesses who stand to lose the most from experimenting with high-risk financial instruments.

Applications like Celsius and Mutlis are already plugging the gap of easy-to-navigate user interfaces, offering substantially higher interest rates than traditional financial applications. Many DeFi projects are lowering the bar for entry by removing the hurdles of extensive KYC credit ratings, allowing the unbanked to participate in a way that breaks down the walls put in place by commercial banks.

Although the governance of on-chain lending protocols is primarily focused on interest rates and stability of the network, in the future these platforms could incentivize participation of individuals and small businesses in order to steer away from centralization caused by whales buying up the entire market. 

Supply and demand

DeFi has value beyond the speculative bubble of yield farming. The blockchain in itself allows for improved supply chain accountability in trustless proof of origin networks and protocols such as VeChain.

While there are an ever-increasing number of projects indulging in high-risk financial tools, the less glamorous side of DeFi and blockchain technology is still developing into something much bigger. 

Projects such as VeChain are reinvigorating supply chain and bringing provenance to the forefront. Proof-of-origin facilitated by the blockchain could prevent the counterfeiting of consumer products as well as medical supplies. During this evolving industrial paradigm, distributed ledger technology could help promote the more sustainable and less-risky offerings of cryptocurrency and decentralized financial instruments, while increasing efficiency in identity verification and data management. 

As governments and central banks across the globe contemplate the coming struggle towards economic recovery, the emergence of blockchain and DeFi presents an opportunity to disrupt the status quo in order to level the playing field for the underrepresented and the unbanked.

Over-collateralized loans could spark an evolution in the redevelopment of industry and commerce for scores of people who are currently excluded from the traditional financial system due to lack of official documentation or poor credit rating.

This could be a catalyst for a change in sentiment around global interoperability and a move further away from mercantilism. 

Global appeal

Mainstream adoption may be way off, however, a number of projects are looking beyond the immediate bubble and into long term solutions for both enterprise and individuals.

There is an abundance of ways to invest, earn, lend and borrow cryptocurrency, the recent increase of crypto-backed debit cards, liquidity pools and in-app staking are already breaking down technological barriers which have prevented adoption previously. Even in the face of the recent Wirecard scandal, the performance of CRO is a testament to the increasing demand for applications which bridge the gap between traditional finance and cryptocurrency.

Incrementally, the wider adoption of cryptocurrency and open finance continues to be facilitated by an impressive range of services and layer two solutions, which are designed specifically to make existing financial tools more accessible. Cryptocurrency taxes and insurance products are becoming a staple as projects like Nexus Mutual and Crypto Trader continue to cover the gaps in the early stages of DeFi’s development.

The huge surge of interest in DeFi from emerging economies points towards the long-term value of this phenomenon.

Although inherently risky, DeFi is providing opportunities which have been essential for growth and prosperity in every generation before them, offering a lifeline for human progression and potential, allowing people to capitalize on the redistribution of wealth and information during a time of accelerated technological innovation. 

Governance tokens may well have been used as a tool for greed up until this point, but there is evidence to suggest that increased accessibility to borderless, frictionless financial applications could become a larger global incentive for the long-term success of DeFi platforms.

If the risks associated with decentralized finance are taken on in the pursuit of entrepreneurship and technological advancement within the DeFi space, the scope for widespread adoption will be broader. The more success stories we see emerging from historically disadvantaged populations, the more likely we are to see a responsible scaling of DeFi and a push towards responsible, mutually-beneficial financial arrangements. 

As infrastructure continues to develop in emerging markets there is an opportunity for fractured economies to be revived in a technological and industrial revolution which many dominant global powers are yet to embrace.

If the community continues to provide attractive economic opportunities that do not discriminate based on nationality, wealth or credit, legacy financial institutions may struggle to compete. Unproductive participants could be forced out and allow for a healthy level of competition during what could be the biggest transfer of wealth in modern history.