Embracing Real-World Demand: DeFi’s Evolutionary Path
Discovering its strength in the face of adversity, decentralized finance (DeFi) has proven to be a resilient force in the digital economy. Acting as a Darwinian sandbox, DeFi has continuously tested and refined concepts in finance, economics, governance, and property rights.
Swapping Credit Risk for Smart Contract Risk
One significant difference between DeFi and traditional finance lies in how credit risk is handled by major protocols. In DeFi, credit risk is replaced by smart contract risk.
In traditional markets, credit risk is inherent in various financial assets, but DeFi eliminates this component. DeFi operates on a collateral-based borrowing system, where your credit record holds no weight. Instead, your borrowing power is solely determined by the value of the collateral you provide. If the collateral’s value falls below the threshold, the smart contract liquidates your position without any recourse or explanation.
On-chain Structured Products: Transparency and Zero Credit Risk
DeFi’s simplicity in handling basic financial products, such as overcollateralized lending, raises questions about implementing a zero-credit-risk model for complex products like exotic options and structured products.
The answer lies in placing the full payoff on-chain through smart contracts. For example, Ribbon Finance’s latest vault utilizes a smart contract to execute the conditional payoffs of a traditional structured product, ensuring full transparency and eliminating credit risk. This approach leverages DeFi’s transparency and programmable money properties.
Driving Adoption with Meaningful Applications
Structured products and exotic options demonstrate how DeFi can capitalize on crypto’s transparency and programmability. By automating complex payoffs, DeFi can tap into a substantial market, as the global volume of structured products reached approximately $1.5 trillion in 2021. To increase adoption, DeFi should focus on enhancing financial solutions that address global demand and adoption, even if it means temporarily setting aside lofty disruptive ideals.
Hot Take: DeFi’s Evolutionary Path to Global Adoption
DeFi has proven its resilience through numerous challenges and regulatory scrutiny. To increase its chances of widespread adoption, the sector should prioritize improving financial solutions that meet current global demands. By embracing real-world applications and demonstrating value, DeFi can secure its place in the evolving financial landscape.
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