Opportunities and Challenges of DeFi

After the Internet bubble in 2001, Carlota Perez, a world-renowned scholar, published an influential book, "Technological Revolution and Financial Capital". In the book, she analyzed five "waves of development" that have occurred in the past 250 years: the Industrial Revolution, the railway explosion, the steel age, the era of mass production, and the information Internet age.

The book believes that the development of each wave of technological development follows the same predictable 6-round development sequence, which is manifested as the technology life cycle (s curve): incubation period, intense reproduction period, excitement period, integration period, maturity period, and finally decline period.

We use the above technology life cycle (s curve) theory to look at the development of blockchain and digital currency. Blockchain is still in the incubation period of the technology development life cycle and has not reached the bubble burst period. It is just because blockchain technology has achieved financial liquidity in the early stages of its life cycle, so the bubble came earlier.

Compared with traditional finance, DeFi decentralized finance has obvious advantages and broad application prospects, but because the historical development of the entire blockchain and digital currency is too short, it is still in its early stages.

DeFi has four opportunities in its current development and foreseeable future:

First, it is the distributed improvement and upgrade of existing financial businesses or services. Although finance has developed for thousands of years, and technology and accounting methods are evolving, many essential logics have not changed, such as the demand for asset-backed lending, collateral clearing and settlement, the security of the financial system, and strict risk control. They still exist in the DeFi financial field, rather than being subverted. They are just improvements and upgrades to traditional finance and services to meet the new needs and developments of the times and finance;

Second, it is to become a distributed basic support for emerging financial scenarios and needs;

Third, on the blockchain network, it improves settlement efficiency across entities, reconstructs governance trust, and coordinates multi-subject cooperation;

Fourth, the interconnection of various DeFi projects. The current DeFi projects are all distributed in a point-like manner, lacking a link to connect them. For example, a prime broker provides margin services, but each fund still needs to submit collateral separately on different exchanges.

If the modern financial system is based on trust and social relations built by countries and nations, then DeFi will be the most important underlying foundation in the process of economic globalization, Internet information globalization, and even global integration. It will connect more countries and regions, more users and people, more economic organizations and production collaboration, and realize a more prosperous new form of world economy.

In addition, DeFi also faces many challenges: fundamental technical constraints, greater business constraints and transformation costs, the coordinated promotion of the overall blockchain industry, and supervision that cannot be ignored.