In crypto winter, DeFi needs an overhaul to mature and grow

For several months now, the decentralized finance (DeFi) sector has been on the receiving end of a major bear market, so much so that the total value locked within this space has slipped from its all-time high of $150 billion (achieved back in May 2022) to its current levels of just over $50 billion. 

Despite this, the amount of capital flowing into this space from “centralized avenues” has grown, largely due to the collapse of FTX alongside other prominent entities like Celsius, Genesis, Vauld, etc. — even doubling trading volumes on many platforms over the course of November 2022 alone. Not only that, amid the recent market volatility, several decentralized exchanges and lending platforms continued to function smoothly, especially in comparison to their centralized counterparts.

Thus, in order for DeFi to truly reach its maximum potential, the sector needs a significant transformation. This is because a large number of protocols operating within this space have been continuing to offer users unsustainable returns for far too long. Moreover, with the recent surge in interest rates, inflation levels — and the so-called “risk-free” rate of return on six-month Treasury bills surpassing 5% — investor interest in decentralized options appears to be diminishing.

In fact, even the rapidly changing macroeconomic environment has affected DeFi, with various established projects implementing significant changes to their reward structures just to remain competitive. For instance, MakerDAO recently voted to increase its Dai (DAI) savings rate tenfold to 1%.

How can DeFi regain consumer confidence?

According to Rachid Ajaja, founder and CEO of AllianceBlock — a decentralized infrastructure platform connecting traditional financial institutions to Web3 applications — DeFi, like all global markets, is going through a cycle right now. And while what happened with Terra, Celsius, Three Arrows Capital and FTX most definitely shook investor confidence, the problem lies with the players operating within the market and not the technology itself. He told Cointelegraph:

“To bolster and maintain consumer confidence, DeFi needs to focus on solutions that put users first and protect them. This means working towards compliant DeFi solutions that focus on identity management, data encryption, data ownership by users, and trustless KYC procedures.” 

“These can pave the way for the tokenization of real-world assets and financial instruments, thereby attracting…