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Time for DeFi to grow up

DeFi has created some extraordinarily innovative ideas, technologies, and solutions to big problems both in TradFi and elsewhere. But it is time for the sector to shed its “crypto rapier” roots and move towards a unified future with “old money TradFi”.

This was the conclusion reached by panellists at the Swarm Markets Institutional Crypto Forum on July 11, 2022.

Participants agreed that DeFi has created a new market with a range of innovative solutions to age-old financial problems. But recent valuation difficulties have perpetuated a stubborn problem for the sector, which has been plagued by pump-and-dump stories, leading to a quick stance by the wealthy in some areas of the sector. The reputation of serious participants is damaged.

The last two months have had pros and cons. DeFi is a vast sandbox of innovation where anyone with the right skills can create and deploy a product or idea. Yet some of these products defy the laws of nature, and many others get caught up in aggressive hype cycles.

The sector needs to look at itself and figure out how to stop getting carried away with lessons that keep being unlearned.

Persistent risks and difficulties in the market have also clouded the real progress made by the major market players. But the recent drop in valuations, panellists agreed, would indeed shake off the unsustainable ideas, leaving behind a core market of vendors that offer real value and innovation.

While transparency is a key selling point for the sector, access has still been a major issue, particularly for end users unfamiliar with some of the more quirky aspects of the market.

Institutional players are still four to five years away from large-scale DeFi adoption, but more crypto-native funds are already coming into play. Access for users must be transparent, easy to use and compliant. DeFi needs to adopt key AML, KYC, and other practices to earn the trust of major institutions looking into the space.

Participants agreed that the building blocks of the sector are now in place. Big questions remain as to how institutional investment can be persuaded to merge with a sector that is still seen as largely “experimental”.

DeFi has suffered from credibility, but it is a short-term problem for the industry. Serious sustainable infrastructure is being built with a heavy focus on institutional products, working with regulated entities and TradFi to examine exactly what DeFi has to offer them now.

The events of May and June were a day of reckoning for the DeFi sector. But despite this noise, the building blocks of DeFi are being built and events in the market have not affected this process.

The original cast of participants – “DeFi 1.0” – are those who made serious efforts to build something innovative and sustainable. Problems arise when opaque, centralized, poorly risk-managed groups enter the space claiming to be DeFi without ever having actually attempted DeFi.

The user experience in DeFi is still a nightmare and that needs to change. Mass Adoption relies on a streamlined approach to improve access for all participants. DeFi needs to invest to mature and find mature solutions to real-world problems.

It must address application rather than arbitrage and end the theater of complexity. White papers are often so overly complex that it seems like they’re trying to hide something, which is a big red flag for due diligence.

The group also recognizes the importance of regulation for the sector. The panelists agreed that DeFi is at an inflection point, where the introduction of important regulatory support will help the market move out of recent troubles and restore confidence to users, investors and innovators in the space.

The good ideas will prevail – DeFi will thrive and these serious players will be the ones building something innovative and sustainable.

It’s clear to the sector that it’s a sandbox full of applications, offering opportunities to basically anyone with an idea and some code knowledge. But now is the time for actors in this space to codify practices, access and regulatory protections so it can thrive in the future.

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