Decentralised finance (DeFi) has been a hot topic lately that, for those not too involved in the fintech scene, seemingly emerged from the shadows of obscurity.
Simply put, DeFi is a system where financial products become available on a public decentralised blockchain network. That means they’re open to anyone to use, rather than going through middlemen like banks or brokerages.
More specifically, DeFi allows for a system where software written on blockchains makes it possible for buyers, sellers, lenders, and borrowers to interact peer-to-peer or with a strictly software-based middleman, rather than a company or institution facilitating a transaction.
This presents new investment alternatives that can be accessed by virtually anyone, flying over the strict regulations traditional financial institutions have worked so hard to establish.
It also opens up the same stakeholders that benefit from DeFi to the same level of risk if they don’t understand it properly, especially due to how unregulated and open the system is.
Should we then be wary, or hop on the train these investment opportunities present? Will DeFi be sustainable in the long run or are they just a risky trend?
From a panel discussion at Wild Digital SEA 2021, we listened in as DeFi experts from the SEA region shed light on some intricacies surrounding the DeFi landscape, and where it’s headed.
Moderated by David Low, the General Manager of Luno in SEA & Australia, the panel was joined by:
The nature of finance has changed
What we once knew as money and traditional investment assets are being decentralised, creating new digital currencies and digital assets that will dictate the economy of the future.
In the past 10 months alone, Sean Lee pointed out that while DeFi is still in its nascent stages, some of the most unexpected trends that have taken place in the market is the speed of innovations cropping up.
“The value of money has been changing very rapidly,” Sean said. “Investors and asset holders are constantly looking for other asset classes to look for capital, both from a retail and institutional perspective.”
Furthermore, because of how DeFi tends to mimic financial systems we see in the real world, it opens up investment opportunities for those in underserved markets as well. Thus, making financial services more accessible and inclusive overall.
Michael Wu agreed, sharing that Amber Group has seen a clear shift in attitudes towards DeFi. People have gone from being dismissive of it to now embracing it with a level of curiosity to understand it.
Interestingly, Michael also noted that people have a clearer demand and better understanding of what they want out of DeFi. They can range from users just interested in the end yields of the investments, to more sophisticated ones who want to get deeper involved in building the DeFi ecosystem.
But there are several stumbling blocks to overcome first
David posed a question to Ken about what he thinks are the main stumbling blocks stopping DeFi from its potential widespread adoption with the technologies available today.
Ken first stated that the current UX and UI for DeFi today is cumbersome and complicated to say the least, even to crypto natives. Performing an action requires multiple clicks, and the language used is not the most intuitive to newcomers who have little to no knowledge or experience within the crypto space.
“A lot of these things are still being built today, in terms of the innovations that’re coming out from community-led developers and aggregators to help power current and, hopefully, the general user down the line to understand the space,” Ken explained.
To add, general education and investment knowledge is required when trading within the DeFi space. This is especially so involving DeFi products that mimic the financial systems already in the real world, such as interest rate swaps, buying and selling stocks, or money borrowing and lending.
But at the same time, there are a lot of crypto-native innovations also being developed that don’t exist in traditional financial systems. Ken believes there is still a big gap, and therefore many new investors may not fully understand the risks-to-reward potential of investments in DeFi.
There’s also the lack of much-needed regulations
An anonymous audience member posed a question to the panel, which David presented to the experts.
The United States Secretary of State (US SEC) questions the very nature of DeFi, saying it has a “lack of transparency and pseudonymity structural hurdles that are bound to hold the market’s development back until the appropriate investor safeguards are put into place.”
Sean was the first to present his perspective in response to that.
“That sounds very funny because to those of us that are in the industry, DeFi has the most transparency. You have the most traceability in all transactions especially when it comes to a public blockchain,” he argued.
“So the notion about transparency is actually quite interesting from that perspective, because if you do know how to track it, everyone can actually do the same thing.”
He reiterated Ken’s point about the need for education as the key to helping the public understand DeFi, along with its associated risks.
And to do so, the public would first need to understand what crypto and blockchain does. These elements work with each other, with blockchain being the technology infrastructure and crypto being the transactional layer.
Sean likened the adoption of DeFi to that of the internet, where people have gone from being wary of data privacy 10 years ago to now using cloud computing everyday.
Ken agreed and added, “DeFi is an unstoppable technology that’s gaining adoption over time.”
Michael shared that he’s been seeing more encouraging results, with players becoming more open minded towards DeFi and crypto. He even stated that regulations are necessary to help the space grow further.
With regulations, there will be more clarity for entrepreneurs to plan their businesses, innovations, and products around.
“When there are regulations, there’s a framework for you to innovate around,” Michael said. “As long as regulators tell us what they’re OK with and what they’re not, where the boundaries are, what are the things they really care about, then I think there’s a solution around it.”
Ken chimed in with his on-the-ground experience in Singapore. He stated that regulators have been very accommodating, even proactively trying to learn from DeFi industry players to implement applicable laws based on expert feedback.
“I think overall it’s very good for the general adoption of cryptocurrencies, our safeguards in place, and investor protection. I think it’s all going in the right direction,” said Ken.
Getting a slice of the pie
Before the session ended, the experts were asked to share their advice on how the average Joe could attempt getting into the crypto space, as it’s the stepping stone into DeFi as a whole.
Sean looks at it from 3 groups, where there are developers, partners (builders of the infrastructure), and crypto holders.
He encouraged up-and-coming developers to first get into the crypto space. It doesn’t matter which protocol is chosen, or where they start, the point is to get started.
As for partners who are actually building the DeFi infrastructure, they need to choose a focus protocol or platform, and figure out how to make it sustainable (both from a business longevity stance and environmental one).
Lastly, Sean advised crypto holders to get educated in the ever-evolving space.
“Don’t think it’s just another token or stock you can just buy or sell. If you are an educated trader in the conventional world, you can probably handle crypto. But if you’re not educated and just following the trend, then the danger is going to be there,” warned Sean.
Ken added that joining platforms like Abra and Amber Group would also be a good start for those who don’t have the time or much knowledge in the crypto space but want to generate yield. To which, Michael joked that you obviously shouldn’t be betting your house on it, but only invest what you can afford to lose.
Getting involved in crypto and DeFi generally has similar notions as playing within the stock market. There’s a high level of understanding and education that needs to take place within the space, and similar risks apply if you’re using it in an irresponsible way.
There’s still a lot of education about DeFi that needs to be done before we see more widespread and safer adoption of it worldwide, but once that happens, we’ll likely see usage snowball.
Featured Image Credit: Ken Chia / Sean Lee / Michael Wu