For several months now, the decentralized finance (DeFi) sector has been on the receiving end of a major bear market, so much so that the total value
For several months now, the decentralized finance (DeFi) sector has been on the receiving end of a major bear market, so much so that the total value locked within this space has slipped from its all-time high of $150 billion (achieved back in May 2022) to its current levels of just over $50 billion.
Despite this, the amount of capital flowing into this space from “centralized avenues” has grown, largely due to the collapse of FTX alongside other prominent entities like Celsius, Genesis, Vauld, etc. — even doubling trading volumes on many platforms over the course of November 2022 alone. Not only that, amid the recent market volatility, several decentralized exchanges and lending platforms continued to function smoothly, especially in comparison to their centralized counterparts.
Thus, in order for DeFi to truly reach its maximum potential, the sector needs a significant transformation. This is because a large number of protocols operating within this space have been continuing to offer users unsustainable returns for far too long. Moreover, with the recent surge in interest rates, inflation levels — and the so-called “risk-free” rate of return on six-month Treasury bills surpassing 5% — investor interest in decentralized options appears to be diminishing.
In fact, even the rapidly changing macroeconomic environment has affected DeFi, with various established projects implementing significant changes to their reward structures just to remain competitive. For instance, MakerDAO recently voted to increase its Dai (DAI) savings rate tenfold to 1%.
How can DeFi regain consumer confidence?
According to Rachid Ajaja, founder and CEO of AllianceBlock — a decentralized infrastructure platform connecting traditional financial institutions to Web3 applications — DeFi, like all global markets, is going through a cycle right now. And while what happened with Terra, Celsius, Three Arrows Capital and FTX most definitely shook investor confidence, the problem lies with the players operating within the market and not the technology itself. He told Cointelegraph:
“To bolster and maintain consumer confidence, DeFi needs to focus on solutions that put users first and protect them. This means working towards compliant DeFi solutions that focus on identity management, data encryption, data ownership by users, and trustless KYC procedures.”
“These can pave the way for the tokenization of real-world assets and financial instruments, thereby attracting more cash flow into DeFi, including from traditional players and institutions who place a high value on compliance and sustainability,” he added.
Similarly, Varun Kumar, founder and CEO of the decentralized exchange Hashflow, told Cointelegraph that, at present, this niche industry needs stronger products that are capable of solving real-world problems. “The DeFi ecosystem is still in an exploration phase, with lots of projects still identifying their respective market fits,” he said.
However, Kumar claimed that, while there is a direct correlation between consumer confidence and declining dollar volumes, it’s important to consider other factors as well. For example, the DeFi boom of 2021 happened amid a strong macroeconomic environment, which had a significant impact on the sector:
“This quick growth was a great kickstarter for the space and created a lot of opportunity. However, now that conditions are different and volumes are much lower, business models and value propositions are being reshaped. Superior products will always win, from which consumer confidence will follow.”
Juana Attieh, co-founder and chief product officer for Fluus, an aggregator of fiat-to-crypto gateways with a crypto ramping network, told Cointelegraph that DeFi’s decline and loss of trust have been due to centralized entities abusing their power and exploiting their consumers time and again.
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To restore market confidence, she believes DeFi participants must prioritize enhancing transparency and creating standards for sharing information about underlying assets, protocols, governance mechanisms and more.
“Security measures must be significantly improved to protect user assets and information. This could include conducting regular audits, implementing bug bounties, and other measures to ensure the safety and security of DeFi protocols,” she said.
Attieh further believes that it is crucial for the sector to work closely with legislators so as to obtain regulatory clarity and devise governance frameworks that can reduce volatility and uncertainty while restoring confidence.
Not everything looks bad
Even though the market is going through a bit of a lull at the moment, Robert Miller, vice president of growth for Fuse, a blockchain-based Web3 payments ecosystem, told Cointelegraph that DeFi (specifically automated market maker-based applications) seems to have found an enormously successful…
cointelegraph.com