DeFi has created some extraordinarily innovative ideas, technologies and solutions to major problems in both TradFi and elsewhere. But it’s time for the sector to shed its ‘crypto degen’ roots and work toward a unifying future with ‘old money TradFi’.

Such was the conclusion of the panellists at the Swarm Markets Institutional Crypto Forum in 11 July 2022. 

Participants agreed that DeFi has created a new market with a range of innovative solutions to age-old financial problems. But recent valuation adversity has perpetuated a stubborn issue for the sector plagued by ‘pump and dump’ stories and get rich quick attitudes from some areas of the sector. The reputation of the serious participants is being harmed.

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

The sector needs to look at itself and figure out how to stop getting so carried away, with lessons that go unlearned time and again. 

Ongoing risks and trouble in the market have also cast a cloud over the genuine progress of key market players. But the recent fall in valuations, panellists agreed, would in fact shake out the unsustainable ideas leaving a core market of providers offering real value and innovation.

While transparency is a key selling point for the sector, access was still a huge issue, especially for end users unaccustomed to some of the quirkier aspects of the marketplace.

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

The participants agreed that the building blocks of the sector are now in place. Big questions remain how to induce institutional investment to merge with what is still seen as a largely ‘experimental’ sector.  

DeFi has taken a hit to its credibility but it is a short-term issue for the industry. Serious sustainable infrastructure is being built with lots of focus on institutional products, working with regulated entities and TradFi looking closely at what DeFi now has to offer them.

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 the ones who’ve made serious efforts to build something innovative and sustainable. Problems emerge when opaque, centralised, poorly risk managed groups enter the space and claim to be DeFi without ever really actually trying to do DeFi.

User experience in DeFi is still a nightmare and that has to change. Mass adoption relies on a streamlined approach to improve access to all participants. DeFi has to invest to mature and make grown up solutions to real world problems.

It needs to tackle application not arbitrage and end the complexity theatre. White papers often are so overly complex it is as if they’re trying to hide something, which is a big due diligence red flag.

The group is also clear on the importance of regulation for the sector. The panellists agreed that DeFi is at an inflection point where the introduction of key regulatory support will help the market move on from recent troubles, giving confidence back to users, investors and innovators within the space.

The good ideas will win out–DeFi will succeed and those serious players will be the ones who build something innovative and sustainable.

What is clear for the sector is it is a sandbox full of many applications, offering opportunities to basically anyone with an idea and some knowledge of code. But the time has now arrived for players in the space to codify practices, access, and regulatory protection in order for it to thrive in the future.