The Future of DeFi - Emerging Evolution

The Law of the Universe

Pareto Distribution, in other words, the 80-20 rule, is often used to describe wealth distribution within societies. The principle still seems to apply; however, in recent decades, the numbers shifted to favor the smaller group even more.

Why should I, the average citizen, care about Pareto Principle?

If we take aside the bias of wealth differences, often accompanied by negative emotions, we will see the mechanics that seem to drive the whole universe. Once you google for examples of Pareto Distribution, you will be flooded with examples ranging from the importance of our actions to natural phenomena.

The world leads to centralization in almost every aspect, as if it was a default state.

It takes a lot of effort to go against the current and build in a decentralized manner. It requires conscious action.

The Shift in Paradigm

What is a paradigm to begin with?

The paradigm resembles a scheme we act upon, a set of rules we follow. Its shift can be compared to a sudden change of pieces on a chessboard or a complete change of the rules.

What kind of a shift can we see today?

The evolution of the world via cooperation, specialization and outsourcing.

The more advanced the society, the more experts we see across various domains. On the individual level, not everyone can or has time to fix a car or prepare an exquisite meal. Businesses implement outsourcing strategies instead of creating separate departments. A similar mechanism can be seen even on the level of countries, taking the semiconductor industry as a vivid example in today’s world.

Is the crypto industry mature enough to undergo such a shift?

To answer this question, let us get a general overview of the industry.

Bitcoin is a relatively closed environment. Ethereum has built its vast ecosystem over years, but still, the applications are limited to being EVM compatible in order to work within the ecosystem or have to use bridges that are currently of substandard quality. On top of that, we have massive monolith chains like Solana, where every transaction is processed by the main chain, slowly leading to network congestion and expensive fees.

Every ecosystem has its own world, which is not always open to cooperation, or is not as easy as it could be.

Is it the same when it comes to DeFi?

The Problem with DeFi

The growth of Decentralized Finance is a conscious action to bring decentralization and empower the individual. Prior to DeFi, people were slowly stripped away from all payment alternatives as those did not fit in the narrative written by the Traditional Finance industry, with its banking system and fiat currencies dependent on the belief in the power of a given country.

After all, your fiat money is just a piece of paper. It is only worth something when the country says so and people believe it. Does anyone remember hyperinflation in the Weimar republic?

Just a note to those unfamiliar with the term. Hyperinflation is not a very high inflation. It is a loss of faith in a given currency, leading to skyrocketing inflation as the currency loses its value and becomes nothing more than a piece of paper.

Imagine people losing faith in the dollar and refusing to accept it as a payment. What happens in such a scenario?

Okay, okay… Let’s get back on track.

DeFi has various problems as it is still in its infancy.

Scammy projects, technical vulnerabilities, dangerous bridges, farming pools dumping tokens on retail, and much more. However, talking about those issues, we might get lost in the details and lose the bigger picture - which is too often the case in the modern world.

Abundant with details, yet blind to see the bigger picture.

What is the real problem then?

Tell me… what constitutes the majority of the liquidity in the DeFi world?

Stablecoins.

- So what? It’s a stablecoin, a part of the crypto world, an ERC-20 contract on Ethereum.

Indeed it is. But in relation to what does it hold its peg?

In relation to the dollar.

Any stablecoin you use is a digital dollar in disguise. While it doesn’t matter so much in the day-to-day world of crypto, it has huge consequences in the long run. Some might claim that regulatory power does not matter in the truly decentralized world of crypto.

I cannot say I agree, but even if… The regulatory power applies to the US dollar, and because of that, it applies to most of the liquidity in the crypto industry.

It spreads the power of dollar issuer - the US - to the world of crypto, to the world of “Decentralized Finance”.

- You’re deranged bro. Go and write another line of internal monologue within your article, hoping it will make you seem more sensible.

Soo… What if overnight the US regulator says everyone using stablecoin other than USDC will be seen as a criminal - as was the case with anyone using TornadoCash?

Looming Centralization

There is one more problem with DeFi related to the beginning of the article - centralization.

I’m not talking here about the centralization of power or governance per se. I’m talking about the centralization of liquidity provided by DeFi protocols.

As stated before, crypto ecosystems tend to be rather closed environments, and while there are attempts to bridge and tie ecosystems together, it is not as simple as it might seem.

Let’s take a look at Ethereum with its huge DeFi space and compare it to Cosmos or Polkadot ecosystems.

During the DeFi Summer, when various DeFi projects were accruing huge liquidity and value expressed in their token prices, the liquidity was locked within the given ecosystem. Brand-new projects could not offer any utility to protocols and users from other networks. Ethereum DeFi has grown tremendously compared to the negligible values of Cosmos and Polkadot.

The growth and hype favoured the ones who already were in a privileged position.

Fast forward to the present day, and we see various instances of bridges far better than the ones from DeFi Summer. I’m not saying current bridges are battle-tested and safe to use. What I’m saying is that we currently have some bridges of higher quality and safety compared to others. Additionally, the industry saw the importance of bridging and how significant it is for a protocol to connect with other ecosystems, leading to the creation of protocols like LayerZero.

Multi-Chain Future

Just as individuals, businesses and countries lead towards specialization and cooperation. The blockchain world is governed by the same principles.

Polkadot is working on its XCM bridge, Cosmos has launched IBC, LayerZero promises to provide the space with high-quality bridges. The industry seems to have accepted the fact that the use of high-quality bridges will be inevitable in the near future and acts accordingly.

Why?

Because the future is Multi-Chain.

Even today, we can see ecosystems being built in a similar manner when looking at the bigger picture.

Ethereum with its Rollups, Avalanche with Subnets, Polkadot and Parachains, Cosmos and its whole ecosystem of specialized protocols. The cooperation between specialized projects is evident and will lead the next high-level trend in relation to the project’s architecture.

How is it linked to DeFi?

Decentralized Finance is also following the trend of becoming specialized. Taking a look at Osmosis in the Cosmos ecosystem, we see a protocol focused entirely on providing DeFi-related utilities. Acala from Polkadot is another example of a highly specialized protocol providing value to every other project built within the ecosystem. Not to mention Ethereum giants like AAVE.

Okay… so we have expert projects in still closed ecosystems. Where is this Multi-Chain vision, you may ask?

Delphi Labs have recently come up with a thesis of DeFi Hubs where liquidity will not be fragmented across various ecosystems but converge into one DeFi hub providing the entire crypto industry with DeFi -related utilities and services.

I’ll stop you here from imagining a hub full of APIs, confusing users as to which one should they choose and which should they avoid.

After all, what we see and use is just a front-end, providing users with easy-to-use utilities. That is why creating one application with a user-friendly UI on top and a mixture of protocols underneath, will be a game-changer for the whole industry.

*We already have protocols like that, but those are limited to their own ecosystems. The idea of DeFi Hub can merge all of them into the main cross-chain DeFi place.

The client is not concerned about the correct temperature and grain structure used to create his alcohol beverage - well... I assume most of us are not concerned with such details. All we care about is a decent beverage we will enjoy drinking.

A similar mechanism applies to the average users. They want to be provided with a high-quality service instead of checking every detail for themselves.

Quick, cheap, and user-friendly - those are the principles clients care about, and those principles the DeFi Hub idea seems to embody.

Not-So-Distant Future

How quickly did we shift from using cash and fax to using digital bank accounts and cloud storage?

It was not so long ago when you could pay for a service or goods in a physical gold coin. It wasn’t so long ago when we were hyped with the first iPhone.

And now?

Digital currencies issued by governments, drone deliveries, social media flooding society with visual stimuli, digital lives we are living across various platforms, and information bubbles Goebbels could only dream about.

Everything has become more interlinked than ever.

That is how the crypto industry will look in the near future - within cells interlinked.

Projects will either cooperate and seek connections or will be doomed to become a shadow of what they used to be. Assuming those are not the protocols issued by huge Web2 companies, with the large financial backing and significant affiliations who will survive by imposing their rules on centralized applications - we already see such protocols, don’t we?

But you do not want to connect your protocol to one of substandard quality. After all, you endanger your clients and your reputation.

The DeFi Hub we have mentioned has to be composed of high-quality protocols entrusted not only by the users but also by other teams.

Bear markets give projects the opportunity to build high-quality protocols, implement key upgrades and mature over time. There is no pressure from investors and the market. Developers don’t have to work in a rush and instead can double and triple-check everything that is going to be shipped.

It is the time of preparation for another bull and another battle for the clients.

AAVE, Synthetix, Maker DAO, and many other well-established protocols are evolving during this bear market to solidify their position and provide even higher quality than before. We are not going to discuss the details here as things might change, evolve or be rejected. The key thing to look for is whether the project is solidifying its position despite harsh market conditions and low liquidity.

On top of that, we see projects upgrading their mechanics and tokenomics to provide users with even better services and investors with even more certainty about future growth.

Conclusions

Is the crypto industry mature enough to undergo such a shift?

Going back to the initial question, we see the space evolves with every trend and every market cycle. Crypto becomes more mainstream slowly but surely, and in the near future, blockchain technology will replace current data storage systems.

DeFi will become an inseparable part of the web3/Metaverse world, which is nothing else than the evolution of the Internet we use today.

If you’d like to understand the Metaverse concepts and see how you can use it to your advantage, here’s the link to the article.

https://hackernoon.com/the-metaverse-a-future-you-cannot-escape

Vast and high-quality specialized hubs will be the key to building the digital economies of Metaverse. The world is slowly shifting towards web3. In case you doubt this, look for headlines involving well-known companies entering the crypto industry and the web3/metaverse. Write them down with dates and see how the number goes up at an incredible pace - and market conditions are not as welcoming as they were a year ago.

So is crypto mature enough to undergo a shift towards specialization?

In my view, the crypto industry is solidifying its foundations with every bear market. If we take a look at the crypto world during the last bear market and compare it with what we see today, the difference is staggering.

What level of consumerization and mainstream will we see in the next bull market?

How significant will crypto become?

For this to unveil, we will have to wait, but the future is built, not discovered.

Remember this and take action to make your own future worth living.

Till next time!

~M.E.

If you enjoyed the article, let me know on Twitter - https://twitter.com/ModernEremite

Resources:

1. https://defillama.com/chains

   
   

2. https://feed.rekt.news/

   
   

3. https://en.wikipedia.org/wiki/Pareto_distribution

   
   

4. https://www.britannica.com/event/hyperinflation-in-the-Weimar-Republic

   
   

5. https://members.delphidigital.io/reports/finding-a-home-for-labs/

   
   

6. https://www.cbpp.org/research/poverty-and-inequality/a-guide-to-statistics-on-historical-trends-in-income-inequality

   
   

7. https://www.coindesk.com/policy/2022/08/21/arrest-of-tornado-cash-developer-draws-dutch-crypto-community-protest/

8. https://unsplash.com/photos/_rZnChsIFuQ