Is the end near for decentralised finance in 2023?

SINGAPORE — With the crash of a series of promi­nent cryp­tocur­ren­cy exchanges last year, a less­er-under­stood cousin in the dig­i­tal asset space – decen­tralised finance (DeFi) – is at a crossroads. 

Observers are at odds about the fate of DeFi, with one camp believ­ing this is the year it will shine as it turns more sus­tain­able, while anoth­er thinks it will run out of steam because mass adop­tion is still out of reach.

Mr Chua U‑Zyn, co-founder and chief tech­nol­o­gy offi­cer at Sin­ga­pore-based Cake DeFi, an online plat­form that offers access to DeFi ser­vices and prod­ucts, said peo­ple are con­fused about what DeFi and cen­tralised finance are. 

“DeFi pro­to­cols are work­ing real­ly well at this time, even though in the indus­try, peo­ple are talk­ing about DeFi fail­ing. None of the major DeFi firms has even cracked a tiny bit – major ones include Uniswap and Mak­er­DAO,” he said. 

DeFi is a blockchain pro­to­col that is gov­erned by smart con­tracts. It gives users greater con­trol over their trades.

Cen­tralised finance (CeFi), which the bank­rupt cryp­to exchanges are part of, gives the exchanges more con­trol, unlike DeFi.

Of late, chat­ter that DeFi is fail­ing has grown.

It comes on the back of a bru­tal year cen­tralised exchanges had in 2022, when promi­nent play­ers such as FTX, Cel­sius, Voy­ager and Sin­ga­pore-based Hodl­naut declared bank­rupt­cy and bil­lions of investor monies were wiped out. 

The trou­bles in CeFi may have pushed some investors to DeFi, but the lat­ter record­ed mut­ed growth last year due to the mar­ket rout, investor jit­ters and the gen­er­al finan­cial climate.

Play­ers point out that total decen­tralised exchanges (DEX) vol­umes across major blockchains and key pro­to­cols in DeFi have risen since the end of Decem­ber, based on data from Dune.

Mak­er­DAO, the largest DeFi loan pro­to­col, has stayed flat since 2022, but data shows that funds have not left DeFi and that usage remains high despite falling prices, Mr Chua said.

Ven­ture cap­i­tal firm Pan­tera Cap­i­tal, which focus­es on cryp­to, said in its 2023 out­look note that DeFi is the future but that it needs to raise liq­uid­i­ty and make pro­to­cols and apps more user-friendly. 

Observers said mak­ing DeFi apps and pro­to­cols eas­i­er to use will dri­ve adop­tion and this will help increase liq­uid­i­ty in the ecosystem. 

Mr Antho­ny Lim, a fel­low for cyber secu­ri­ty, gov­er­nance and fin­tech at the Sin­ga­pore Uni­ver­si­ty of Social Sci­ences, believes DeFi, while inno­v­a­tive and well inten­tioned, came on the scene too quickly.

He point­ed out that it is under­stood and con­trolled by only a small group of players. 

“The major­i­ty of the world does not real­ly know about DeFi, let alone under­stand, embrace or con­sid­er it. It is more geeky than sexy. 

“Then, as it moved too quick­ly, it start­ed to have prob­lems as it is not com­pat­i­ble with the tra­di­tion­al eco­nom­ic sys­tem the world is being run by as we know it.”