Three ways to bring DeFi into the mainstream

Decentralised finance (DeFi) is giving people a front-row seat to a financial revolution, making it possible for anyone to access financial products without banks, brokers, or reams of documentation. But for DeFi to really improve our lives – and deliver the full suite of efficiency, security and affordability it promises – it must become more accessible.  

As it stands, decentralised finance is still the ‘wild west’ for users and investors, plagued by recurring stories of hacks and market volatility. In addition, the latest DeFi applications can be complicated for even seasoned crypto enthusiasts. So it’s no surprise that DeFi hasn’t entered the mainstream yet.

If we want DeFi to win, we must do all we can to make it a safe, user-friendly financial industry. Here are three ways to begin:

1. Create structure through regulation

Crypto-natives often see regulation as a threat to the space’s decentralisation. But regulation isn’t only about restriction – it also improves transparency and safety for builders, investors and users.

In traditional finance (TradFi), financial services licences are notoriously difficult to obtain as companies must navigate a multitude of regulations. But this hasn’t stopped the global industry from growing up to 10% annually in recent years.

So how can regulations support DeFi?

• Institutional onboarding: Most institutional customers are risk-averse. So investing in (or using) a space where hacks and government announcements can move the market significantly isn’t attractive. Instead, regulations will clarify the liability, privacy and sovereignty of crypto investments – aspects that institutions value.
• Investor and user safety: While certifications and audits already exist in DeFi, it’s difficult to know their reliability. Regulations will bring uniformity to audit processes and DeFi protocol safety.
• Certainty for builders: Many would-be DeFi apps are sitting on the sidelines because founders are unsure what they can or can’t do. They need regulations to provide clear project guidelines, improving DeFi’s stability.

The good news is that governments worldwide recognise the need for clear legislation regarding DeFi and crypto. However, by definition, it’s going to be a slow process.

Shane Verner, A/NZ Sales Director at crypto custody firm Fireblocks, believes that the sooner the space has some form of regulation, the sooner DeFi will become mainstream. At a recent Australian DeFi event hosted by Sensand, he suggested that initial regulations don’t need to be perfect – even “a light regulatory wrapper” will provide surety to large-scale investors and help reduce crypto’s bad actors.

2. Reduce security breaches and scams

Crypto and DeFi are often associated with hacks and security breaches. In 2022 alone, bridge hacks have been responsible for over $1 billion in stolen investor funds.

The most notable breaches this year include Wormhole at $326 million and Axie Infinity (Ronin) at $624 million. Source: CNBC

Some of the ways that hackers gain access to these funds include:

• Discord: Discord is one of the main places where investors and users get project updates. The simplest discord hacking strategy involves inviting other investors to join a ‘hot’ new investment or get free tokens. Once someone signs a transaction with their wallet, hackers gain access to their funds.
• Social media: On Twitter, you’ll find influencers and investors searching for the next big ‘alpha’ tip. Hackers use this fact to their advantage by building, hacking, impersonating or bribing social accounts to engage in scams.
• Programming errors: While not a regular occurrence, code errors can lead to significant hacks. Wormhole’s dev team was in the process of fixing a security issue when the attacker forged a transaction signature that allowed them to mint 120,000 wETH tokens.

Like most online scams, there are many ways to identify and prevent breaches in crypto and DeFi, including:

• Conducting in-depth audits through a reputable blockchain security company like CertiK.
• Reducing anonymity for founders through identity confirmation projects like Doxed and Alder Mages.
• Introducing strict standards for user communications and operating procedures, as Axie Infinity did after the Ronin hack.  
• Design clear, easy-to-understand interfaces so users can see the type of access they provide in a smart contract.
• Practising good crypto hygiene – for example, avoiding links posted on Twitter or Discord.

3. Education and promotion

Although DeFi can seem like a busy space, it still pales alongside TradFi, which accounts for over $100 trillion in capital flows compared to DeFi’s $53 billion. To flip this in DeFi’s favour, we need more educational resources for users, investors and builders to share their knowledge.

That said, we do have excellent resources that we can promote and improve upon, such as:

• The Finematics and Whiteboard Crypto YouTube channels share easy-to-understand videos and demonstrations.
• Comprehensive resources like web3 academy share content across YouTube, Discord and more.
• Traditional courses such as Coursera offer.
• In-person events like Australian DeFi’s meetups or the DeFi Security Summit.

It shouldn’t only be up to large-scale educators to bring DeFi knowledge into the mainstream. As a user and investor, you can share your knowledge and experiences with friends, colleagues and acquaintances.

It’s much easier to work through misconceptions with someone who trusts you – whereas sceptics can easily ignore an online resource that doesn’t match their beliefs.

Remember, it’s still early days

While we’re all keen for the fruits of DeFi to reach the masses, it won’t be mainstream for some time. And when it finally is, it won’t be a spectacular event. Instead, mainstream DeFi will be boring and virtually invisible to the end user.

When that happens, we can’t know for sure, but Raoul Pal shared an interesting extrapolation on Twitter. At a 63% network adoption rate (much lower than at the time of his tweet), crypto would have 4 billion users by 2030.

Personally, I’d like to see it happen a bit quicker than that – but, as they say, all good things take time.

What are some other ways we can help DeFi reach the mainstream? Let me know in the comments below!