SINGAPORE - With the crash of a series of prominent cryptocurrency exchanges last year, a lesser-understood cousin in the digital asset space – decentralised finance (DeFi) – is at a crossroads.
Observers are at odds about the fate of DeFi, with one camp believing this is the year it will shine as it turns more sustainable, while another thinks it will run out of steam because mass adoption is still out of reach.
Mr Chua U-Zyn, co-founder and chief technology officer at Singapore-based Cake DeFi, an online platform that offers access to DeFi services and products, said people are confused about what DeFi and centralised finance are.
“DeFi protocols are working really well at this time, even though in the industry, people are talking about DeFi failing. None of the major DeFi firms has even cracked a tiny bit – major ones include Uniswap and MakerDAO,” he said.
DeFi is a blockchain protocol that is governed by smart contracts. It gives users greater control over their trades.
Centralised finance (CeFi), which the bankrupt crypto exchanges are part of, gives the exchanges more control, unlike DeFi.
Of late, chatter that DeFi is failing has grown.
It comes on the back of a brutal year centralised exchanges had in 2022, when prominent players such as FTX, Celsius, Voyager and Singapore-based Hodlnaut declared bankruptcy and billions of investor monies were wiped out.
The troubles in CeFi may have pushed some investors to DeFi, but the latter recorded muted growth last year due to the market rout, investor jitters and the general financial climate.
Players point out that total decentralised exchanges (DEX) volumes across major blockchains and key protocols in DeFi have risen since the end of December, based on data from Dune.
MakerDAO, the largest DeFi loan protocol, has stayed flat since 2022, but data shows that funds have not left DeFi and that usage remains high despite falling prices, Mr Chua said.
Venture capital firm Pantera Capital, which focuses on crypto, said in its 2023 outlook note that DeFi is the future but that it needs to raise liquidity and make protocols and apps more user-friendly.
Observers said making DeFi apps and protocols easier to use will drive adoption and this will help increase liquidity in the ecosystem.
Mr Anthony Lim, a fellow for cyber security, governance and fintech at the Singapore University of Social Sciences, believes DeFi, while innovative and well intentioned, came on the scene too quickly.
He pointed out that it is understood and controlled by only a small group of players.
“The majority of the world does not really know about DeFi, let alone understand, embrace or consider it. It is more geeky than sexy.
“Then, as it moved too quickly, it started to have problems as it is not compatible with the traditional economic system the world is being run by as we know it.”
The lack of knowledge perpetuated a negative market condition in DeFi, and along with this, a loss of investor confidence and low adoption, Mr Lim said. “As long as there is a lack of mainstream adoption and critical mass, and without enough applications using it, DeFi will fade out,” he added.
But Mr Chua is bullish about DeFi’s prospects this year.
He said the days of unsustainable yields are over, and that people are more realistic and becoming more educated about how DeFi works.
“The (double-digit) yield that we’ve seen the last two years or so was mainly because of new tokens that were generated when people use DeFi products. It’s like an enticement to get into DeFi,” Mr Chua said.
Now, yields on DEXs hover at 3 per cent and 4 per cent – a sign that the returns are generated through actual use of a protocol, he said.
“So the theme for this year actually is more of a real DeFi, where the yield of DeFi is not coming from inflation or from the minting or printing of new DeFi tokens,” he added.
While only time will tell how the year will pan out for DeFi players, Mr Lim cautioned that people wanting to enter the space should think about what is in it for the various players.
