DeFi Doesn’t Have an Existential Problem

An article in the Wall Street Journal on June 30th proudly proclaimed that “DeFi has an Existential Problem.”

It then went on to detail all of the numerous issues with companies such as Celsius, BlockFi, and Three Arrows Capital, all of which have had major liquidity crises in recent weeks due to the downturn in the crypto and broader markets.

The author, Jon Sidreau, states that while DeFi has promise, it’s basically gone down the same pit of financial ruin that Wall St., the entity it is meant to replace, fell into leading up to the 2008 financial crisis.

He writes:

“Digital currencies like bitcoin are too inconvenient to live up to their promise of ending the concentration of money in a relatively small number of banks, asset managers and governments. DeFi, by contrast, promises some genuine advantages in exchange for cutting out these middlemen. By executing applications on distributed ledgers, “smart contracts” can automatically unlock transactions between peers once certain conditions are met.

To the glee of its critics, DeFi has ended up committing all the same sins as Wall Street, essentially becoming a vehicle for a new generation to engage in the rampant speculation typical of pre-2008 investment bankers.

Here’s my issue with the article.

All of the critiques that he lobs against Celsius, BlockFi, and the others are accurate, because they aren’t DeFi. There’s nothing really “decentralized” about these firms. They are centralized financial firms that were speculating in the crypto markets.

DeFi, as he points out before veering entirely off course, is about lowering costs, friction, and barriers to access by eliminating middlemen. Celsius and BlockFi are the very definition of middlemen.

So, saying that “DeFi has an existential crisis” because two centralized firms, lacking transparency, behaved badly, is like saying that the Internet had an existential crisis in 2000 because was a failure.

We haven’t even gotten to true DeFi yet. All we’ve got is a proof-of-concept that it’s possible to do common financial functions like lending, borrowing, etc. on a decentralized public network.

It’s not an existential crisis facing DeFi, it’s an engineering crisis.

The fact is that crypto infrastructure, today, is garbage.

The base layers can’t scale to the level that a modern financial system requires. Even the purported fastest chains (when they work) are nowhere near close enough to what will be necessary.

And that’s just the beginning.

The development environment is horrific. Coders must reinvent concepts like tokens every single time they want to build an application. It’s like trying to build a car from parts in your garage, but having to start off with the problem of building a tire and an engine and a door before getting down to the actual car itself. It takes too long and it leads to errors, which is why can make a living documenting hacks and thefts in the ecosystem.

And the programming languages are designed for a previous era.

The Internet is about the transfer of information, so the programming languages are designed to move messages from one place to another. DeFi, when it hits maturity-and it WILL hit maturity- is about moving assets from one place to another. There’s only one programming language in the world that is oriented around that concept, Scrypto, and most developers of the next wave of Fintech haven’t started to think and build with an asset-oriented mindset.

Yes, it’s been 14 years since Satoshi released the Bitcoin whitepaper, but does Mr. Sindreu really think that upgrading the infrastructure of the global financial system can be deployed that quickly?

The Internet started in the 1960s. I guess he would be shocked to see that by 1975, nothing had happened?

The good news is that, like the evolution from dial-up modems to widespread broadband, engineering problems (even crises) can, and will be, addressed.

The innovation of decentralized public ledgers (thank you Satoshi) and smart contracts (thank you Vitalik) have been made. Now, it’s a question of making the whole thing work better.

That’s going to happen because the cost, trust, and speed benefits of DeFi, true DeFi, will be orders of magnitude better than TradFi/CeFi. It may take time, so don’t get distracted by crypto-tangential firms like Celsius and Three Arrows behaving badly.

The scientific revolution started in the late 1600s because of increased transparency of information and knowledge. The financial revolution is starting today for the same reason.

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