In the crypto winter, DeFi needs an overhaul to mature and grow

For 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 fallen from its all-time high of $150 billion (reached back in May 2022). to the current level of just over 50 billion dollars.

Despite this, the amount of capital flowing into this space from “centralized avenues” has grown, mainly due to the collapse of FTX along with other prominent entities such as Celsius, Genesis, Vauld, etc. – even doubling the trading volumes on many platforms during the November 2022 course alone. Not only that, amid the recent market volatility, several decentralized exchanges and lending platforms continued to perform smoothly, especially compared to their centralized counterparts.

Therefore, 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 area have continued to offer users unsustainable returns for far too long. With the recent rise in interest rates, inflation levels – and the so-called “risk-free” yield on six-month T-bills exceeding 5% – investor interest in decentralized options appears to be waning.

Indeed, 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 example, MakerDAO recently voted to increase its Dai (DAI) savings rate tenfold to 1%.

How can DeFi regain consumer trust?

According to Rachid Ajaja, founder and CEO of AllianceBlock – a decentralized infrastructure platform that connects traditional financial institutions to Web3 applications – DeFi, like all global markets, is going through a cycle right now. And although what happened to Terra, Celsius, Three Arrows Capital and FTX definitely shook investor confidence, the problem lies with the players operating in the market and not the technology itself. He told Cointelegraph:

“To strengthen and maintain consumer trust, DeFi must focus on solutions that put users first and protect them. This means working towards compliant DeFi solutions that focus on identity management, data encryption, user data ownership and trustless KYC procedures.”

“These could pave the way for tokenization of real-world assets and financial instruments, thereby attracting more cash flow to DeFi, including from traditional players and institutions that place high value on compliance and sustainability,” he added.

Similarly, Varun Kumar, founder and CEO of decentralized exchange Hashflow, told Cointelegraph that this niche industry currently needs stronger products capable of solving real-world problems. “The DeFi ecosystem is still in an exploratory phase, with many projects still identifying their respective market fits,” he said.

However, Kumar argued that while there is a direct correlation between consumer confidence and falling dollar volumes, it is important to consider other factors as well. For example, the DeFi boom of 2021 occurred amid a strong macroeconomic environment, which had a significant impact on the sector:

“This rapid growth was a good kickstarter for the space and created many opportunities. But now that conditions are different and volumes are much lower, business models and value propositions are being reshaped. Superior products will always win, and consumer confidence will follow.”

Juana Attieh, co-founder and chief product officer of Fluus, an aggregator of fiat-to-crypto gateways with a crypto-ramping network, told Cointelegraph that DeFi’s decline and loss of trust is due to centralized entities abusing their power and exploiting their consumers . time and again.

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To restore confidence in the market, she believes DeFi participants must prioritize improving transparency and creating standards for sharing information about underlying assets, protocols, governance mechanisms and more.

“Security measures must be significantly improved to protect users’ 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 to achieve regulatory clarity and develop governance frameworks that can reduce volatility and uncertainty while restoring confidence.

Not everything looks bad

Although 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 a hugely successful product-market fit during the last innovation cycle. He said:

“Despite the fall, the fact that $50 billion in liquidity is still being deployed to DeFi protocols is exciting and unprecedented in the financial world, where we usually need to rely on institutional market makers and lenders as catalysts to get the economy going. once to.”

Miller admitted that increased consumer confidence and demand will only come with improved user experiences. “Even as a seasoned crypto professional, I still struggle to use well-known DeFi apps, so I can’t imagine how difficult it must be for the layman,” he added.

Andy Ku, CEO of Altava Group, a Web3 digital content ecosystem, believes that sometimes things have to get really bad for them to eventually become stable. He told Cointelegraph that in the past, bad actors have loosely used the word DeFi to promote platforms that were more or less completely centralized.

But in his view, most quality DeFi projects today are firmly rooted in the ethos of transparency, with a growing list of these offerings now undergoing smart contract audits and publishing proof-of-reserve reports to restore confidence in the space.

“The growing distrust of traditional financial institutions is what has given birth to DeFi. The balancing act now is how to evolve DeFi into something that has more transparency, oversight and accountability, he said.

Where does the future of DeFi lie?

Learning from the various high-profile scandals of 2022, Ajaja believes the next wave of DeFi will place a stronger emphasis on compliance and customer experience. In this regard, she noted that we are already seeing the emergence of projects focused on providing compatible DeFi solutions that integrate trustless Know Your Customer and Know Your Transaction protocols, which are key to the long-term use of traditional industries.

In addition, the concept of self-custody is also quickly becoming important in the minds of many users, with more and more DeFi projects working on self-custody solutions that provide full control and ownership of their assets and data. These wallets make it easy to manage and recover assets, store encrypted digital identities and verifiable credentials, and give users full control over how they share this information.

Attieh believes that while the bear market may have caused a decline in the adoption of some DeFi projects, especially as investors become more risk-averse, it is likely that the most robust projects with strong fundamentals and real-world use cases will continue to flourish and gain impact, even under challenging economic conditions.

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In a somewhat similar vein, Daniel Fogg, president and chief operating officer of IOVLabs, the firm behind Rootstock — a smart contract platform secured by the Bitcoin Network — told Cointelegraph that the only positive outcome to come from the ongoing crypto winter is that it has reduced the white the noise around the ecosystem, adding:

“We see more builders and fewer buzzwords. For the DeFi sector to cross the chasm, teams building crypto projects must focus on accessibility, usability and utility. We need to build products that solve real problems for real people – pay bills, send money to family members abroad, get protection against ongoing inflation, find safe places to save their money.”

Therefore, as we move into a future powered by decentralized technologies, it will be interesting to see how the rapidly evolving decentralized finance paradigm continues to mature, especially with more people looking to disintermediate paths.