defi – Blockchain & AI Forum

Namaste Yogis. Welcome to the Blockchain & AI Forum, where your technology questions are answered! Here no question is too mundane. As a bonus, a proverb is also included. Today’s question was submitted by Liz from Paraguay, and she wants to know the latest university research findings on decentralized finance (DeFi).

Liz, you came to the right place. After receiving your question, it piqued my curiosity. Guess what? I found a treasure source of information! Before jumping into the findings, I’ll start by defining DeFi for new members to my blog.

Investopedia says, DeFi is an emerging financial technology, consisting of blockchains, software, and secure distributed ledgers, analogous to those used by crypto currencies. DeFI technology removes third parties and centralized institutions from financial transactions. DeFi challenges traditional finance by empowering individuals with the power to conduct peer-to-peer transactions. Now let’s discuss a research report produced by the University of Zurich, called “A Taxonomy for Decentralized Finance.”
https://www.zora.uzh.ch/id/eprint/254150/1/1_s2.0_S1057521924000152_main.pdf

Finding 1: Ethereum Reigns Supreme
Ethereum founders loved Bitcoin but noticed its limited utility. Their solution was to create Ethereum in 2014 as a second generation blockchain project that could be programmed to run on “smart contracts.” Smart contracts are code written into a blockchain that executes the actions two parties agree to outside the chain. By automating these actions, the need for an intermediary or trust between the parties is removed, and BOOM, you get the foundation upon which DeFi is constructed.

DeFi start-ups love Ethereum. In fact, 36% of all DeFi start-ups use Ethereum as their base layer technology. There are alternatives to Ethereum, including Solana, Cardano, etc. but no other layer one blockchain comes close to Ethereum for DeFi start-ups.

Finding 2: DeFi is Moving Towards Decentralized Governance
DeFi start-ups are built with the goal of eventually becoming decentralized in their governance. This is not surprising. After all, DeFi is constructed on the premise, perils, and promise of decentralization. Earlier this year, the Securities and Exchange Commission (SEC) approved Bitcoin and Ethereum ETFs. The SEC relented and finally recognized the decentralized nature of their governance. Other decentralized layer one blockchain projects may also receive SEC future approval relatively soon.

Finding 3: DeFi Systems Need Interoperability
Blockchain projects are monolingual. Essentially, blockchains don’t “communicate” well with each other. DeFi will not surpass traditional finance until interoperability becomes a DeFI reality.

Today, DeFi projects are essentially incapable of interacting with one another. Yes, there are “bridges” that connect blockchains. However, existing bridges are slow, weak, and incapable of sustaining a large-scale financial system. As Cardano founder Charles Hoskinson has said dozens of times, “… blockchains need to become as interoperable as Wi-Fi for mass adoption to take root.”

Finding 4: Regulatory Risk
DeFi pioneers are sailing unchartered regulatory waters. I’m not referring to fraud. Fraud is illegal regardless of technology and there are plenty of existing laws against fraud. I’m referring to the failure of Congress to pass DeFi legislation. The result? The SEC has stepped into this power vacuum and has deployed its enforcement authority to decide DeFi policy! Unelected bureaucrats are the bosses. What’s worse, SEC is a captured regulator. Captured by who? Captured by the industry it regulates and the incumbents are not too keen on opening the door to competition.

Let’s end with a proverb from Paraguay, where they are fond of saying: “… a lamb with a little mark will eventually leave the flock”.

Until next time,

Yogi Nelson

Namaste Yogis. Welcome to the Blockchain & AI Forum, where your technology questions are answered, mostly correct! Here no question is too mundane. As a bonus, a proverb is also included. Today’s question, comes from Oswaldo, in New York, and he wants to know what does Moody’s Investor Service (Moody’s) forecast for digital finance adoption in 2024 and beyond?

Oswaldo, you came to the right place. On December 14, the Decentralized Finance office of Moody’s released a report, titled: 2024 Outlook: Digital Finance Slowly, Steadily Moves Towards Interoperability and Standardization. The research was led by Christiano Ventricelli; here is the link: https://www.moodys.com/research/Decentralized-Finance-and-Digital-Assets-Global-2024-Outlook-Digital-finance-Outlook–PBC_1386273?cid=web-ntrnlbnnr-16640 Before jumping into their forecast, first let’s understand who is Moody’s?

Moody’s has been around since 1908 and it offers credit ratings, macro-economic forecasting, and several other services, including Investor Service. Moody’s produces research papers across numerous financial topics, including digital finance. With that short introduction, let’s examine Moody’s four findings.

Mass Adoption Will Need More Interoperability and Standardization. According to Moody’s, blockchain technology has numerous potential benefits, including greater efficiency and potential cost savings. Blockchain enthusiasts agree. I concur with Moody’s that until and unless blockchains reach interoperability the benefits of blockchain may not materialize. What Moody’s did not say, but I will, is blockchains need a “Wi-Fi moment”. Imagine if Wi-Fi was not seamless and users had to switch constantly to maintain a connection? What a mess! This is the state of public blockchains today. There are bridges under construction to connect blockchains, but most are too tiny, weak, and not suitable at enterprise scale.

Asset tokenization will keep growing, but reliable digital cash options remain elusive. Yes, asset tokenization will result in convergence between traditional and digital finance. Agreed. And, yes, it’s true there are tech and regulatory risk considerations. However, I part ways with Moody’s regarding digital cash adoption options. Moody’s believes Central Bank Digital Currencies are better positioned to be a secure form of digital cash over stable coins. In the USA probably true. However, across the globe government creditability on matters of monetary policy is at rock-bottom; hence, let’s withhold judgment.

Cryptocurrency market’s revival hinges on monetary policy and service operators’ regulatory compliance. There are dozens, perhaps hundreds, of industries whose viability hinge on monetary policy. Cheap money is positive for crypto, and all assets. What drives crypto goes beyond interest rates and monetary policy. Crypto is also an ideological movement. Crypto enthusiasts want a new monetary policy–an alternative that Jerome can’t control. Hence, suggesting the crypto market hinges on traditional finance is missing the point.

As former federal bank regulatory compliance officer, I am unaware of any industry that can operate at scale outside regulatory compliance other than organized crime! Holy criminal enterprise, Batman! Hence, the findings are not surprising. And yes, crypto needs clarity. Is it a security? Is it a commodity? Etc.

Digital asset regulatory frameworks advance, though regional differences will persist. Bingo, Moody’s is on target. Europe, Singapore, and the United Arab Emirates are all establishing regulatory clarity. Therefore, regional differences will arise in crypto as they do in traditional securities regulations. The U.S. Securities and Exchange Commission (SEC) is expected to approve a spot Bitcoin ETF soon. An Ethereum spot EFT is on the horizon. The SEC recently sued Coinbase, the largest crypto exchange in the USA, for selling unregistered securities. Between the Coinbase case, and the 2024 Presidential Election, clarity maybe on the horizon.

I close with a proverb from Moldova: Wine is a traitor. It starts as a friend and ends as an enemy.

Until next time,

Yogi Nelson

Tag: defi

Challenges and Opportunities in DeFi: University of Zurich’s Taxonomy Report

WHAT IS THE FUTURE OF DIGITAL FINANCE ADOPTION ACCORDING TO MOODY’S?