When DeFi Into CeFi?Crypto investor and Ethereum advocate, Ryan Sean Adams [@RyanSAdams], delved into the things that could be holding DeFi back in his latest Bankless newsletter. He refers to a ‘protocol sink’ theory which predicts that eventually, crypto banks will integrate DeFi and protocols will become ‘economically dense’, sinking to the bottom of the crypto money stack. A few examples of this include Coinbase’s interest offering on Dai, and OKEx supporting the Dai Savings Rate (DSR) in late 2019 (which is still zero percent at the moment). Adams is convinced that DeFi will rule eventually,
“The protocol sink thesis predicts DeFi will become the base layer for crypto banks. A necessary step before it becomes the base layer for legacy banks.”But not so fast … Strategy lead at Compound Labs, Calvin Liu, shared his experiences with DeFi by showing his father how to use Compound. Eleven steps are required just to start earning interest on a stablecoin via a platform, and each one is complicated, as Liu attests,
“DeFi is complicated, it’s too hard to use, it needs dramatic UX improvements in order to cross the chasm to mainstream and retail use.”He added that a number of these steps could have been automated by the platform making the entire process cheaper, faster, and easier for the end-user. With almost $4.5 billion locked in DeFi protocols today, there are a lot of people manually figuring out these steps in order to access bank-busting interest rates and returns. This in itself shows that crypto users are starting to shift away from centralized exchanges and into DeFi protocols at an accelerating pace.
“This should be scary for large centralized exchanges. They print money, are run by some of the smartest people in the world, and have every capacity to integrate DeFi protocols.”At the moment, none of the major crypto exchanges have made any effort to integrate DeFi protocols as a way to keep customers on the exchange. Liu has spent time in dialogue with several exchanges and has eight major take-away’s why this integration has yet to materialize.
The ComplexitiesFirstly, DeFi smart contracts are complex and go way beyond the mechanisms used on current generation crypto exchange trading platforms. Crypto exchanges are also uncomfortable with independent custody since they want to hold the crypto themselves. Most exchanges do not have the technical abilities to ward off attacks and patch smart contract vulnerabilities. This year’s DeFi boom has also been like Christmas every day for hackers seeking exploits. Synthetix founder, Kain Warwick [@kaiynne], was quick to acknowledge this in an unrelated comment about an ICO,
“DeFi is early and dangerous, we have all kinds of risks: hacks, bugs, scams, centrisation, manipulation, front running the list goes on.”Liu added that upgrading existing infrastructure to integrate DeFi would cause a lot of friction for centralized exchanges which hold a lot of cryptocurrency in just a few secure wallets. There is also little incentive to take risks outside of the core business model which clearly works for major exchanges. Most exchanges monetize trading volume over assets under management (AUM) which, for the moment, removes DeFi as a sustainable business model. Staking commissions, for example, will be the next big thing for exchanges, just as leverage and spreads on trading is at the moment. Major exchanges are also risk-averse, he added, and are largely unwilling to venture into new grounds. There are also legal and regulatory implications with DeFi. Exchanges have been battling for the past couple of years to operate under some form of a regulatory umbrella. DeFi is still the wild west in this regard with virtually no KYC requirements for most protocols. Liu concluded that exchanges need to innovate in order to keep up with the rapidly changing pace of the industry, and this would include the integration of DeFi.
“Crypto is an exponentially growing industry, and if an exchange want to keep up, its business also needs to innovate at an exponential rate. It’s too early in the crypto industry to follow ‘best practices’ – you have to invent them.”
Aave Launches DeFi DashboardTaking a step towards simplifying things for the end-user, Aave has introduced a DeFi Saver dashboard. The flash loan protocol is aiming to keep pace with the likes of Compound. It plans to streamline some of the above-mentioned steps. According to an announcement, the new platform provides a slick user interface for portfolio management. It added that the goal is to make the entire process more efficient by including overall portfolio stats, detailed information on all supplied and borrowed funds, and an overview of all supported assets and their current market stats. A couple of features called Boost and Repay have been included which allow users to increase leverage, and unwind positions by paying off debt using supplied funds. A Smart Wallet has also been developed to hold the entire portfolio as opposed to standard ones which are limited to one smart contract interaction per transaction. Aave, which recently upgraded its tokenomics model, added,
“DeFi Saver Automation currently manages 450 unique MakerDAO and Compound positions with more than 100k ETH and over $43m worth of collateralized assets in total.”DeFi projects themselves realize they need to innovate in order to onboard more users. This means making things easier and cheaper for them. CeFi, on the other hand, needs to follow suit or face the prospect of being left behind in a rapidly changing financial landscape.
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