Ethereum co-founder Vitalik Buterin recently created a ripple on crypto Twitter write that DeFi “It’s like an ouroboros (a snake biting its own tail): the value of crypto tokens is that you can use them to earn a yield that is paid by… the people who trade crypto tokens.”
He went on to note that “while DeFi may be great, it is fundamentally capped and cannot be _the_ thing that will drive crypto to another 10x to 100x adoption explosion.”
Vitalik is not wrong.
The ethos of decentralized finance (DeFi) is based on the belief that a blockchain-based financial system will free society from rent-seeking intermediaries and make financial services accessible to the unbanked on a global scale.
And yet, it’s not hard to miss that much of what is considered “DeFi” today actually resembles a circular casino that facilitates speculation on tokens whose value derives primarily from the monetization of token speculation.
It is not sacrilegious to acknowledge this fact, nor to accept that this current version of DeFi is clearly not sustainable. The demand for speculation on circular tokens and there is not an infinite amount of retail capital to burn.
DeFi in its current state It’s not the catalyst that will drive cryptocurrency adoption beyond current levels, but that doesn’t mean creating an on-chain tokenized casino was for nothing.
Learn more: Vitalik Buterin reflects on Ethereum’s strengths and weaknesses
DeFi, in its current form, has proven that an on-chain financial system can be created that provides all the basic primitives that an open, globally accessible, and robust financial system would need: payments, swaps, lending, derivatives, insurance, and much more.
The infrastructure and protocols that underpin DeFi effectively reduce risk and counterparty costs, while increasing transparency and accessibility — even if the initial product-market fit is as little as a token bet.
So how can DeFi overcome its obsession with circular token play and play its part in scaling crypto adoption?
Tokenized assets
At its most basic level, blockchains are the best way to issue, transfer, and track assets through the creation of digital tokens. Finance revolves around asset management, making DeFi the most tangible and obvious growth opportunity for crypto.
But to grow, the DeFi economy needs access to more tokenized assets. While cryptocurrencies have helped DeFi reach where it is today, evolving beyond the casino stage means looking at where most of the world’s capital is. And the answer is obvious.
Tokenizing all assets in the traditional financial system (bank deposits, commercial paper, treasury bills, mutual funds, money market funds, stocks, futures, options, swaps, etc.) would bring hundreds of trillions of dollars of capital onto the chain.
Just one firm, BlackRock, manages nearly five times more assets ($10.5 trillion) than the market capitalization of the entire cryptocurrency market ($2.2 trillion).
This is capital that can then be seamlessly integrated into existing on-chain financial protocols, allowing for hot swapping of token sets with real-world funding. Far from being a pipe dream, many the world’s largest financial institutions are actively positioning themselves for a future where tokenization is the status quo.
In less than six months, BlackRock’s tokenized fund on Ethereum, BUIDL, has surpassed $500 million in assets under management, bringing the total value of Tokenized government securities on public blockchains at over $1.5 billion. While this amount represents only a small fraction of the value contained in the traditional system, the active participation of the world’s largest asset manager within a public blockchain ecosystem speaks volumes.
Read more: James Wo – How Ethereum 2.0 Can Transform DeFi
Additionally, stablecoins have proven that the demand for tokenized assets is real. With over $150 billion in US Dollars Tokenized On-Chainand a monthly transfer volume of $1.4 trillion, stablecoin usage now rivals that of established payment networks such as Visa. While not often thought of as tokenized assets, the only difference between Circle’s USDC and BlackRock’s BUIDL is who receives the yield.
Stablecoins highlight the fundamental value of tokenization, as they allow anyone to transfer dollars to anyone else in the world with just an internet connection. Transactions are settled in less than a second and for less than a cent in fees. For anyone living in a country with a hyperinflationary currency, who has tried to make a cross-border payment, or who simply wants to make a financial transaction on a weekend or holiday, the advantages of stablecoins are immediately evident.
While the DeFi token game will never completely disappear, it is clear that the underlying infrastructure that currently enables DeFi will eventually define how the global economy functions. The way forward is to accept a simple fact: tokenized assets are a superior way to represent financial assets.
Note: The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
