Author: Chainlink Community Liaison Zach Rynes, Coindesk; Translated by: Baishui, Golden Finance
Ethereum co-founder Vitalik Buterin recently created a thread on Crypto Twitter, writing that DeFi “feels like an Ouroboros [a snake biting its own tail]: the value of crypto tokens is that you can earn a yield on them, and those yields are paid by people who trade crypto tokens.”
He went on to note that “while DeFi may be great, it is fundamentally capped and cannot be the factor that causes crypto to see another 10-100x adoption boom.”
Vitalik is right.
The ethos of decentralized finance (DeFi) is the belief that a blockchain-based financial system will free society from rent-seeking intermediaries and make financial services accessible to the world’s unbanked.
However, it’s easy to overlook that much of what is considered “DeFi” today is really just a circular casino that facilitates speculation in tokens whose value is primarily derived from the monetization of that speculation.
The demand for circulating token speculation is limited, while retail capital is not unlimited.
DeFi in its current state is not the catalyst that will expand cryptocurrency adoption to current levels, but that doesn’t mean creating on-chain token casinos is a futile endeavor.
DeFi in its current form has proven that it is possible to create an on-chain financial system that provides all the core primitives required for an open, globally accessible, and robust financial system: payments, swaps, lending, derivatives, insurance, and more.
The infrastructure and protocols that DeFi relies on do reduce counterparty risk and costs while increasing transparency and accessibility — even if the initial product-market fit is little more than token gambling.
So how can DeFi overcome its cyclical obsession with token gambling and play its rightful role in expanding cryptocurrency adoption?
Tokenized assets
At the most basic level, blockchain is the best way to issue, transfer, and track assets through the creation of digital tokens. Finance revolves around asset management, which makes DeFi the most tangible and obvious growth opportunity for cryptocurrencies.
However, to grow, the DeFi economy needs to acquire more assets that can be represented as tokens. While cryptocurrencies have pushed DeFi to where it is today, growing beyond the casino stage means looking for where most of the world’s capital is. The answer is obvious.
Tokenizing all assets within the traditional financial system (bank deposits, commercial paper, treasury bonds, mutual funds, money market funds, stocks, futures, options, swaps, etc.) will bring hundreds of trillions of dollars worth of on-chain capital.
A company called BlackRock manages almost five times as much assets ($10.5 trillion) as the entire crypto market is worth ($2.2 trillion).
This capital can be seamlessly plugged into existing on-chain financial protocols, effectively hot-swapping token gambling with real-world financing. This is far from a pipe dream, and many of the world’s largest financial institutions are actively preparing for a future where tokenization becomes the status quo.
In less than half a year, BlackRock’s tokenized fund BUIDL on Ethereum has surpassed $500 million in assets under management, bringing the total value of tokenized government securities on public blockchains to over $1.5 billion. While this figure is only a fraction of the value contained in traditional systems, the active participation of the world’s largest asset management company in the public blockchain ecosystem speaks volumes.
Additionally, stablecoins have proven to be an overwhelming demand for tokenized assets. With over $150 billion in USD tokenized on-chain and $1.4 trillion in monthly transfers, stablecoin usage is now comparable to established payment networks like Visa. While Circle’s USDC and BlackRock’s BUIDL are not typically considered tokenized assets, the only difference between the two is who gets the yield.
Stablecoins highlight the core value of tokenization because they allow anyone to transfer dollars to anyone in the world with just an internet connection. Transactions are completed in less than a second and cost less than a penny. The benefits of stablecoins are obvious to anyone who lives in a country with an over-inflated currency, is trying to send money across borders, or simply wants to conduct financial transactions over the weekend or during vacation.
While DeFi token gambling will never completely disappear, it is clear that the underlying infrastructure that currently supports DeFi will determine how the world economy works. The path forward stems from a simple fact: tokenized assets are a superior way to represent financial assets.