In 2022, a spate of DeFi hacks and centralised finance (CeFi) failures blighted trust in the industry and attainable yield dropped to near zero. The coming 12 months will be pivotal in shaping the future of DeFi as a viable option for mainstream investors.
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From the peak of $180 billion to a current low of $41 billion, DeFi has ridden a turbulent wave. The total value locked (TVL) in DeFi protocols is currently sitting at levels last seen two years ago, having reversed the gains accrued through 2021. Much of this decline in TVL can be attributed to the declining price of DeFi assets such as ETH, CRV and AAVE.
But the malaise affecting the DeFi industry isn’t a price problem, it’s merely a symptom of the true issue – a lack of innovation. DeFi as we know it sprang to life with the launch of Uniswap in late 2018. As the first truly usable decentralised exchange (DEX), it can be credited with much of what followed: multi-tokenization, DeFi primitives for lending, borrowing, trading, and the invention of everything from yield farming to algorithmic stablecoins.
For the first two years, DeFi flourished as developers and users fell in love with the tools that created decentralised systems for wealth management, savings and payments. Sometime around 2021, however, this Cambrian explosion of DeFi innovations slowed to a crawl. An industry that had started out with the promise of banking the unbanked degenerated into a series of increasingly elaborate Ponzi schemes, fueled by unsustainable yield and impossible APYs.
Transforming the DeFi landscape
If 2021’s DeFi motif was stagnation, last year’s was contagion. While the events that rocked the crypto market in 2022 don’t need retelling, they proved that neither DeFi or CeFi are immune from the same human frailties that have toppled great empires: greed, envy and deceit. From the $2 billion lost in bridge exploits to the multiples more gone in the collapse of Terra’s algorithmic stablecoin and the domino effect that ensued, last year’s winners were the projects still left standing.
One of those survivors was Yield App (YLD). By adhering to its strict investment risk management framework to avoid the temptation of UST and similar failed DeFi products, the digital wealth platform spared its users from financial ruin.
As hacks proliferated and yields plummeted, it became clear the future of DeFi depends on whether it can evolve. That’s when Yield App took it upon itself to devise a novel solution: a system for capturing the most successful elements of DeFi without the hazards that have driven away investors in droves. The result of this return to the drawing board is Haven1, a protocol that looks radically different to anything that’s been done in DeFi.
DeFi finds its safe haven
Haven1 has been designed as a secure network for institutional and professional crypto investors to interact without fear of hacks or exploits. It seeks to deliver all the use cases available in DeFi – lending, saving, trading, yield – without the risks that have made DeFi an adversarial environment.
Designed to operate as an Ethereum sidechain, Haven1 will be fully KYC’d and compliant. Not much fun if you’re a degen trying to ape into the latest memecoin, but eminently useful for professional investors trying to avoid being front-run, phished or rugged.
The challenges of creating a permissioned blockchain that connects to the permissionless world of Ethereum and everything else that lies beyond are substantial. How does one capture the most successful elements of DeFi and incorporate them into a regulatory-compliant chain without destroying everything that makes decentralisation so appealing?
Attempts at creating “CeDeFi” so far have fallen flat. Recall those staking programs on centralised exchanges and the sort of lending schemes that became casualties of 2022’s great crypto collapse.
Cognizant of these failures, the Yield App team has given careful consideration to how they can improve the most exciting elements of DeFi. The Yield App CEO Tim Frost has indeed previously shared his thoughts on DeFi investing.
Proposed use cases include on-chain lending powered by real-world credit scores, in a similar fashion to traditional personal loans. The provable identity framework also supports the integration of blockchain with real-world assets. This could, for example, allow NFTs to serve as proof of property ownership, which in turn would facilitate the creation of investment vehicles backed by real estate.
Haven1 is an ambitious project, and it remains to be seen if its target audience of HNW and professional investors take to it when the chain, which uses Proof of Authority consensus, finally launches. But it’s clear DeFi in its current form is unpalatable to many aspiring users, who may have been rugged enough times to ever fully regain trust in permissionless protocols.
The future of DeFi
Regulatory scrutiny can only be expected to intensify as DeFi faces its biggest year yet. If 2022 was all about surviving, 2023 will be all about navigating a new landscape in which compliance is key. This might not be the stuff that 100x wins and triple-digit APYs are made of, but if DeFi can deliver sustainable yields in a safe and secure manner, it could bring financial independence to millions.