This
post
is
part
of
Consensus
Magazine’s
Trading
Week,
sponsored
by
CME.
In
light
of
the
transformative
changes
in
the
crypto
landscape,
the
decentralized
finance
(DeFi)
sector
has
seen
an
extraordinary
rise,
followed
by
moments
of
decline.
As
users
grapple
with
intricate
challenges
—
from
managing
private
keys
to
navigating
various
protocols
—
it’s
evident
that
the
simplicity
once
associated
with
traditional
finance
is
starkly
missing.
Connor
O’Shea
is
CEO
at
Bril
Finance.
Now,
DeFi
is
at
a
crossroads,
and
it
must
overcome
these
obstacles
and
embrace
a
renewed
emphasis
on
simplicity,
optimization,
and
performant
returns.
Obstacles
limiting
the
potential
of
DeFi
One
of
the
major
concerns
in
this
DeFi
landscape
is
its
volatility,
which
isn’t
just
confined
to
fluctuating
asset
prices;
it’s
deeply
entrenched
in
the
ecosystem,
as
illustrated
by
mercurial
total
value
locked
(TVL)
in
DeFi.
The
rise
to
$212
billion
in
TVL
—
followed
by
a
precipitous
drop
to
$43.45
billion
within
a
year
—
is
a
testament
to
crypto’s
inherent
instability.
Amid
these
dynamics,
the
challenge
of
direct
liquidity
provision
rears
its
head.
Traders
who
venture
into
open
platforms
like
Uniswap,
hoping
to
capitalize
on
liquidity
provision,
often
grapple
with
impermanent
loss.
This
is
a
phenomenon
where
traders
can
end
up
with
lower
returns
due
to
asset
price
fluctuations
or
negative
yields.
Centralized
exchanges
(CEXs)
have
had
their
share
of
controversies,
too.
Recent
events,
such
as
troubling
data
breaches
at
Gemini
and
the
collapse
of
FTX,
have
eroded
trust
in
CEXs.
Such
incidents
have
inadvertently
thrust
DEXs
into
the
limelight
as
viable
alternatives
(underscored
by
a
significant
24%
surge
in
DEXs
following
the
collapse
of
FTX).
As
DEXs
capitalize
on
this
momentum
and
fear,
they’re
faced
with
the
limitations
of
automated
market
makers
(AMMs),
the
most
common
type
of
architecture
supporting
decentralized
exchanges.
While
AMMs
have
been
instrumental
in
the
DEX
revolution
—
allowing
liquidity
provision
without
traditional
order
books
—
they
are
fraught
with
challenges.
New
users
often
find
AMMs
non-intuitive
and
difficult
to
navigate,
especially
when
dealing
with
highly
volatile
trading
pairs.
To
truly
challenge
CEXs,
DEXs
need
to
integrate
advanced
order
book
models
that
complement
on-chain
smart
contracts.
Platforms
like
dYdX
have
ventured
into
this
territory,
but
striking
a
balance
between
robust
decentralization
and
efficient
trade
execution
is
no
easy
feat.
See
also:
Examining
dYdX’s
Path
to
Profitable
DeFi
|
Galen
Moore
Central
to
cryptocurrency
ethos
is
the
drive
for
decentralization,
a
principle
immortalized
in
the
Bitcoin
white
paper.
Recent
incidents
in
the
DeFi
space,
coupled
with
the
broader
crypto
sentiment,
are
reshaping
the
narrative
in
favor
of
a
more
decentralized
trading
environment.
However,
the
road
ahead
is
not
without
its
challenges.
The
sharp
decline
in
crypto
assets,
with
ether
(ETH)
plunging
from
almost
$4,800
to
a
low
of
$1,600
this
year,
has
led
to
a
major
reduction
in
the
TVL
of
staked
ETH.
Further,
near
constant
DeFi
exploits
raise
concerns
about
the
sector’s
sustainability.
Empowering
users
For
DeFi
platforms
to
rise
from
these
setbacks
and
truly
achieve
their
potential,
a
shift
in
strategy
is
imperative.
A
significant
aspect
of
this
resurgence
hinges
on
user
adoption.
DEXs
need
to
rectify
obvious
pain
points
and
continue
to
innovate
and
cater
to
a
hopefully
expanding
user
base.
New
solutions
are
stepping
in
to
make
things
simpler
and
more
transparent
while
staying
true
to
the
spirit
of
decentralization.
Imagine
a
platform
that
simplifies
the
user
experience.
Users
wouldn’t
have
to
grapple
with
technical
jargon
or
juggle
private
keys
and
protocols.
Instead,
they’d
access
a
friendly
interface
that’d
use
powerful
algorithms
to
make
asset
custody
simple.
The
goal
here
is
to
stay
agile
and
responsive
—
especially
as
market
conditions
change
and
address
the
unpredictability
of
TVL
in
DeFi.
DeFi
is
ultimately
about
building
trust.
Every
action
a
protocol
takes
is
recorded
and
transparent
—
thanks
to
blockchain.
But
solutions
between
chains
must
also
be
interoperable,
making
it
easier
for
assets
to
shift
between
different
platforms.
That
way
users
can
tap
into
the
best
of
what
each
blockchain
offers.
A
more
collaborative
approach
might
just
be
an
antidote
to
problems
individual
DeFi
platforms
face
—
especially
fluctuating
TVLs.
The
road
to
compliance
As
the
DeFi
sector
evolves,
the
emerging
regulatory
landscape
cannot
be
overlooked.
Global
regulators
—
spurred
by
market
fluctuations
and
concerns
about
accountability
—
are
keenly
eyeing
DeFi.
IOSCO’s
proposed
framework
emphasizes
investor
protection
and
transparent
disclosures.
Yet,
inherent
pseudonymity
in
DeFi
poses
challenges
for
clear
oversight.
With
the
framework’s
expected
release
by
late
2023
and
member
countries
poised
to
adopt
its
recommendations
—
it’s
crucial
for
DeFi
platforms
to
proactively
adapt.
Embracing
compliance
isn’t
just
about
meeting
regulations;
it’s
about
fortifying
trust
and
ensuring
DeFi’s
sustainable
growth
in
the
broader
financial
ecosystem.