The DeFi story to rule them all Defi on Medium

This is the second article on storytelling importance for crypto industry. The first part on the Bitcoin story can be found here.

Fascinating stories led to the 2017 altcoin bubble. With nothing more than just a white paper, a website and a captivating story to revolutionize the world using blockchain technology, projects raised millions of dollars. In 2020 DeFi has a great story to do the same.

Current traditional financial system is broken. It benefits only the 1% and it causes financial crisis that we, the tax payers have to pay for.

But imagine a world where not your bank, but you control your money. Out of the reach of corrupt politicians.

A world where sending the money to your loved ones abroad costs cents and takes seconds instead of days. Where you can invest, trade and earn interest anywhere, anytime in a private and transparent way with just your phone and internet access. And if you don’t like the system, you are free to vote and change the rules to your favor.

Are you in or out?

People believe in stories rather than facts. The simpler the story, the stronger the influence it has on our imagination, on our behavior and our ability to cooperate in large numbers. As the fictional stories go, DeFi is a charming one. The number of converts to the DeFi movement is increasing fast as shown by the growth of protocols, investment in the space and token prices.

DeFi vision of a decentralized financial world with a promise to bring financial freedom to everyone, accessible from anywhere with just an internet connection is simple and alluring enough to make us imagine a radically different world. The one that we want to be a part of.

DeFi offers equality and sanctuary from discrimination with a right to vote on the most important smart contract changes.

The promise of a decentralized governance is equally attractive. While the western governments are struggling to unite the people around a crumbling liberal-democratic human story and banks are suffering from image problems, DeFi offers equality and sanctuary from discrimination with a right to vote on the most important smart contract changes.

It gives the feeling of belonging and hope that your financial situation is finally in your hands. Indeed, the DeFi story, one could claim, is far more coherent and alluring than the Bitcoin one.

Bitcoin was born 12 years ago as “A Peer-to-Peer Electronic Cash System” but few consider Bitcoin to be a suitable digital cash fit for payments. The community is in search for a seductive story, yet in many people’s minds Bitcoin is synonymous with money laundering, speculation, funding for terrorism, drug trafficking, sex trade and the list of illegal activities goes on.

Headlines like ‘Bitcoin Has Lost Steam. But Criminals Still Love It’ in the mainstream media makes it difficult to distant Bitcoin from this narrative. Additionally, the crypto industry dominated by centralized exchanges with many hacks, run away scams and unexpected closures had to create something new to fit the promised future of a decentralized world.

DeFi technical and identity issues reshape the story

DeFi is still in its infancy stage and does not suffer from these connections. As a movement it is one of the fastest growing areas of blockchain to grab our imagination. As it happened to Bitcoin, the bigger the movement gets, the more obvious technical and identity issues become.

As a daily DeFi protocol user and observer of the community, the disconnection between the DeFi promised land and the technical realities is becoming more noticeable. Few of the technical limitations include:

1. DeFi smart contracts face issues as gas prices rise by exorbitant levels, reducing attractiveness for low capital users;

2. The level of De (decentralization) of DeFi is getting more questionable, because in all protocols the team centrally controls platform development & updates. Voting, in fact, is more like an ‘advisory referendum’;

3. What is more, DeFi (and the governance) is Still Dominated by Super Rich Tokenholders, mostly by the protocol founders;

4. Everything is over collateralized, increasing capital opportunity costs;

5. When it comes to trading, acquiring leverage or synthetic assets, DeFi is lagging behind its centralized alternatives. At least for the foreseeable future.

6. Immutability means mistakes in interacting with DeFi protocols are irreversible and costly.

Founder of Litecoin on DeFi

In order for the story to stay relevant, it has to adapt to technological realities. According to Y. N. Harari technology and fictional story always dance a delicate tango. “They push one another, depend on one another and cannot stray too far away from one another”. Technology is what we make with it.

The 2017 bull market projects failed to materialize the promises of a radically better world and most of the projects are in a clinical death. I believe that with enough energy and dedication, most of the technical limitation can be dealt with, but we might face an identity split from within.

The story of ‘unbank the banked’ is failing to attract unity even among the most enthusiastic early adopters of DeFi.

According to the Coingecko March 2020 survey, DeFi is dominated by young men in their 20s, and most respondents either are not aware of DeFi product brands or lack the knowledge to use them.

Critically, people are divided between wanting to go completely bankless and somewhat impartial to do so, meaning that the story of ‘unbank the banked’ is failing to attract unity even among the most enthusiastic early adopters of DeFi.

Even more dividing is the latest MakerDAO proposal to include real-world assets to the protocol. The community proposes to include freight forward invoices and musicians’ future royalty streams as a crypto loan collateral for its stable coin DAI.

Until quite recently, DeFi was commonly understood as an alternative financial system for pure crypto-native assets, mainly to facilitate margin trading. Founded in 2014, before DeFi gone parabolic, MakerDAO is still the leader in DeFi by the value locked.

In fact, for the long time MakerDAO was synonymous with Defi itself and drove the industry forward. If the latest proposal is adopted (it seems like it will), MakerDAO will once again shake up the current crypto narrative of DeFi and will force the community to redefine the story of DeFi. It is a brave step forward needed to move DeFi from just a facilitator for margin trading.

Regulation and DeFi relationship is complicated

The relationship with regulation is moving the marketed vision of anonymity and equal accessibility further away. ConsenSys is launching a DeFi-focused compliance service to monitor user transactions.

Perhaps soon enough we will have to use DeFi with KYC (even if it’s DID). In this case, how will the moto of ‘DeFi used by anyone, anywhere, anytime’ hold when 1 billion of the world population does not even have an ID document.

These changes are necessary to move the industry forward and as the stories are always changing, the DeFi one will change as well. The question is: will the story get more attractive or distance its followers further away?


The DeFi story to rule them all was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.

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Dapp Digest: June 2020