I am still not sold on the value proposition of DeFi. 5 key criticisms.

Who is DeFi really revolutionary for?

Is DeFi a good thing primarily for those who live in unstable countries?

After working full-time in a blockchain startup specifically working on Ethereum, and after spending way too much time learning and using various DeFi protocols, I am still not sold on its various value propositions. There are some clever and creative solutions out there, and we're obviously only starting out. But I still feel like the core offerings of DeFi are weak, and its goals are the same as those of the traditional financial system, i.e. maximise returns. It's not useful or viable for "the little guy". I would love to be proven wrong. Let's look at a few examples (in no particular order), with my thoughts and criticisms.

1. Higher interest rates

I've played around with both Aave and Compound. Getting 7-10% interest rate on my deposits is obviously cool. But this is – like Mark Cuban stated in the Bankless podcast – a game of musical chairs. The music will stop. In other words, the high interest rate we're seeing is primarily due to the market being relatively small. It won't stay this high long term.

The rates are supply and demand based, so if we suddenly saw a major influx of people stream into Aave to deposit USDC, the supply would be way too high, and rates would drop, removing the actual reason why people wanted to use the service to start with. As the market grows, rates will lower as well. That's classic economics. So this is a short term value prop only.

2. Novel applications and programmable money

Let's use TokenSets as our first example. I love it and use it, but it's nothing revolutionary. It's like placing your money in a fund, except that you have a robot that manages and rebalances your fund instead of a person. It's also cool that anyone can create a fund strategy (assuming they have the knowhow) and publish it for anyone to follow, but for the user/investor, it's still "just" a fund.

How about no loss lotteries? Again – it's a fun application, but it's still "just" a lottery.

Exotic products, like margin trading, perpetuals, yield farming etc? Sure, it's cool if you know what you're doing, but it's still going to appeal to a small fraction of the population – and I'll venture a guess that it's most likely those who already work in or with finance and that have capital to manage. It will probably not benefit or be viable for "the little guy".

3. Open to anyone. No KYC. Censorship resistant

I mean, having previously worked in banking, KYC is without a doubt good. Knowing who you deal with is good. Being able to track and stop fraudulent or criminal transactions is a good thing. Banks (at least in civilized countries) won't stop/censor a normal person's payment. Why is it a good thing to remove these mechanisms? What's ironic is that when banks fail doing their KYC checks properly, then we – the crypto sphere – jump on it and make it out to be proof of why banks are bad. It's hypocritical.

Furthermore, a common argument is that criminals don't use crypto. I'd say again, this is due to it being a relatively small market, and the UX for most applications have been bad. Path of least resistance for most people – including criminals – is still cash and systems they know. As the market grows, it's not unreasonable to assume that a percentage of those getting into the market will use it for bad. A proper system for preventing fraud, CTF or other illegal activities surely must be good?

4. It leads to more open, decentralized and liberalized finance markets

Open: Sure, a market that is open 24/7 is good for the finance people who already operate actively in the market. Not for anyone else.

Decentralized: This is valuable to me generally – not just for DeFi, but as a system in general. But I would argue it's not important for the majority of the population. "Not controlled by one company? Ok, but how does that benefit me directly?"

Liberalized: Do we really want a more liberalized financial market? We've seen many times what that has lead to (e.g. repeal of Glass Steagal). Sound regulation on financial markets is critical, otherwise it'll devolve into whatever financial play that turns the highest yield, disregarding everyone and everything else. And sometimes that ends up with an enormous crash and decades of recovery. Not good. Regulation is good.

5. Allow everyone to participate in the financial markets

I can already do everything I want to do and need to do within the existing financial infrastructure. Send instant, feeless payments. Trade stocks and funds. Leverage my investments and speculate. Gamble. Insure my shit. The stuff that is important to me, I can already do. That which is not important is offered by smaller players adjacent to the financial market.

I live in Scandinavia, where we have a robust, well developed and well regulated financial system, high trust in government, low corruption etc. That is obviously not the case everywhere, so the question then becomes: Does the value propositions of DeFi fall short in highly developed nations like the Nordic countries? Is it only beneficial for people with failed governments, failed economies etc?

Closing thoughts

Maybe I am looking for something in DeFi that never was meant to be there – something that helps the little guy – not just an unregulated, unscrupolous, wild west finance market that will undoubtedly be attractive to those who already have capital to invest, but not so much for others.

The technology is cool. But looking strictly from an end-user perspective, DeFi is still not as big as it's made out to be.