DeFi: Is This What Will Democratise Finance?

Updated: Jul 21, 2021

This article was originally published in Blockchain Industry Review - a Crypto Curry Club Magazine published monthly and available in soft copy and the printed version.

An Interview with Featured Contributor, Anish Mohammed

Co-founder of end-to-end privacy protocol for digital assets, Panther Protocol

Decentralised Finance or DeFi - the latest buzzword in FinTech and crypto.

Anish chose to divide DeFi into three core components.

  1. The first is the underlying infrastructure which at this moment in time is Ethereum, which also has some issues notably in the price of gas.

  2. The second layer is derived from traditional financial instruments including automated market makers, bonding curves and other financial tools.

  3. The third layer is the governance processor the Decentralised Autonomous Organisations (DAOs) characterised by the staking of tokens and voting of the community.

“All three come together to allow DeFi to do what it is doing right now with governance being the key – without governance you’d just have pumping and dumping.”

Anish argues that in traditional finance regulatory bodies do the overseeing, whereas in the crypto world it’s the governance that fulfills that function. There is no oversight body or bodies in cryptocurrency and so the community votes with their feet.

The optimist in Anish believes it will be the community that will therefore influence the evolution of ecosystems, of protocols, to create and maintain fair, open and transparent systems. Anish stresses that transparency is the key here too.

“If you put your money into a bank it is totally opaque, you have no idea what is happening and what outcomes you are likely to get. By comparison in DeFI you can see how you will be rewarded based on the protocol; the processes are auditable, and the ecosystem is largely transparent. The barrier to looking under the financial hood has been broken by DeFI.”

Anish is hopeful. He believes that, especially once the disputes die down,

DeFi will look to democratise access to finance for everyone.

“One of the things I am looking forward to is when the underlying layer, Ethereum, gets to a point where it can handle the traffic.

Ethereum currently is a bit like Uber drivers in Bangalore; when the trafficgets heavy, they put up their prices. Unless you pay higher fees, your trade won’t go through.

Worst case the outcome is more like having a limited supply of bread, you join the long queue but by the time to get to the shopkeeper, there is no bread left and the shop closes down.

“This is the situation right now. We don’t have the ability to process trades but when the throughput is good enough then it’s a game changer; no traffic jams, no surge prices in Uber and people allowed access to finance without needing a bank account.”

Despite Ethereum’s traffic jams, Anish is still relatively upbeat with solutions coming forward such as sharding and rollups. In simple terms sharding is akin to doing date queries or spot checking queues whereas rollups only involve checking the topmost transaction. Then there are Zero Knowledge Rollups or ZK rollups which Anish explains by saying - Zero knowledge proof is like you see someone in a room with only one door, yet minutes later the person is beside you outside the room without having used the door.

You have no knowledge how it came to pass but the person is most definitely outside the room.

These improvements would definitely speed up throughput, according to Anish.

“You need to look at the total number of developers and the total number of users on Ethereum and that outstrips all other blockchains by a couple of orders of magnitude."
"While we wait for better throughput, other contenders such as Cosmos, Polkadot and Algorand can offer solutions but their current numbers of devs, users and capital are still very tiny by comparison."

I questioned Anish about the second layer; if we are porting traditional financial instruments to the blockchain, can we improve them at the same time?

Absolutely, is his reply.

"Let’s talk about CDOs or collateralized debt obligations. When stacking multiple debt vehicles in traditional financial instruments ,the individual risk ratings are opaque.

Even if the bundle of CDOs contains lots of risk, the producer can still tie it up and put a triple A credit risk on the top and no one is the wiser.

Using Zero Knowledge proofs, we can use math to prove or disprove if the CDO is actually a triple A rating or not. It’s not up for negotiation".

There is no buddy buddy system where I scratch your back and you scratch mine, nothing like this can happen between a smart contract and an oracle.

"Smart contracts and Oracles don’t have emotions. Right now, a very small minority of people make decisions for the 7.5 billion people living on this planet and the decisions only favour the tiny minority, that is not fair.”

Anish argues that having an efficient protocol with governance would make the cost of doing transactions on the blockchain very cheap with much less friction.

“You just need to push a button.”

How can we ensure we get good governance?

“Humans as a species have been evolving, mostly positively. We learn from our mistakes and I believe we will reach a place where we will have much better mechanisms in place. I don’t see us going backwards– I think that is a low probability.”

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