​​Decentralised Finance (DeFi)- a concept that has yet to evolve

Defi is a buzzword that suggests freedom, but paradoxically, the freedom it promises is held back by a lack of regulation. So will governments, public bodies, and large-scale financial and legal institutions ever really turn away from records and ledgers?

 Having the ability to conduct one’s affairs, financial business, and contractual business on ‘open-ledgers’, verified by the monitoring of blocks of transactions – that theoretically, all can see – is certainly a powerful new game changer for society. No more centralized ledgers full of transaction details, fewer fees, and delays – no middleman entities between parties – and, most importantly for some, the practicality of pure ‘end-user’ to ‘end user’ freedom. 

Yet, Defi seems to be compromised. Unregulated and left to its own devices – which is part of the attraction – who looks after the consumer and who monitors the potential abuses and downsides – someone, or something, has to. There is also the question as to whether Defi is suitable for a ‘localized circuit of activities’, a particular discipline or industry, or whether the concept really is going to work for macro applications such as intergovernmental payments or the running of national currencies. The huge investment in time and brainpower that nearly all governments around the world have deployed to assess and trial Central Bank Digital Currencies, shows that something within the concept of Defi has value. Reduced transaction times and cost are certainly achievable with Defi and it is this more than anything else that probably makes it seem like the future. But the operation of CBDCs is more akin to a closed, traditional ledger system, controlled by issuing authority and with the power to restrict, limit, and govern where necessary, it’s hard to see how a CBDC can be otherwise. Even in the world of Defi and cryptocurrencies where openness is all, it would seem that ‘the buck has to stop somewhere’.

 Money swilling around the system where each note and financial transaction is accounted for in ledgers between issuers and users hasn’t really evolved much from the ‘double entry’ bookkeeping of old. Will a CBDC be able to do away with this in some way? China has a CBDC being rolled out, yet has banned cryptocurrency dealing, trading, and spending. The motivation for this must be control – a CBDC has a degree of control whilst cryptocurrency for the masses is seen as a no-no. Another perspective, this time from the Bank of England, was that a CBDC offers no more real advantage over the current system – the one which has served the world so well to date – well apart from the odd financial meltdown, hyperinflation, and sub-prime mortgage lending catastrophes which society throws up on a regular basis.

 The Coincub Defi Factor

Defi works well in many respects. Transacting on a peer peer-to-peer basis without bank accounts for one, speed for another. Fees and commissions may be lower than traditional means of transacting money, but wallets and crypto exchanges do charge these too. According to DeFi Pulse, the total value of Defi applications topped $107 billion by the end of November 2021. And Defi is open 24 hours a day – usage, of course, is not with the possibilities of fraud, which unlike the closed system of transacting, means losses can often be irrecoverable.

In our Coincub rankings, we have attempted to rank countries according to the development of their crypto economies including legislation, volumes of trading, numbers of blockchain companies, and the openness of banks and institutions to cryptocurrency investment and activity. One of our categories is Defi which, whilst it underpins crypto and also has many other potential applications, still has a long way to go at the macro-financial level.

Defi is more prevalent in the private sector, and this is where the growth and development of the concept appear to be thriving. Our Defi Factor score is simply an amalgamation of the scores from three categories in our country rankings: ICOs, blockchain companies, and Defi start-ups, which added together give us an additional ‘Defi Factor’ score for each country.