Staking Brings Decentralization Back to DeFi

Decentralized finance (DeFi) has a problem. We set out to build a financial alternative, driven by the shortcomings of opaque businesses that often put their interests over those of their customers. The goal was a decentralized, self-governed economy that was transparent and largely independent from external influences.

Instead, crypto markets today hang on Federal Reserve Chair Jerome Powell’s every word, run almost entirely on centralized stablecoins and are onboarding real-world bonds as collateral assets.

This article is part of “Staking Week.” Conor Ryder is the head of research and data at Ethena Labs.

While I’m fully aligned with a pragmatic approach — making short-term sacrifices that give us a better chance of reaching an end goal — the time has come to accept that DeFi as it stands today is not so decentralized. Blockchain finance might be a better term.

But crypto native staking yields can help bring us back to DeFi.

How have we got to this point?

Stablecoins

Many previous attempts at decentralized stablecoins have fallen by the wayside. In short, this is because they either have struggled to scale and compete with their centralized counterparts, or they scaled too quickly based on fundamentally flawed designs.

Decentralized stablecoins are the holy grail, but we have seen a lack of innovation in the space since the collapse of Terra. Novel approaches are dismissed immediately if they dare suggest anything but an overcollateralized approach. DeFi was left scarred and shaken after Terra, and an emphasis since then has been placed on security, at the expense of innovation.

Centralized stablecoins power DeFi today, with more than a 95% market share of on-chain volumes versus their more decentralized counterparts. Web2 incumbents like PayPal entering the stablecoin space will only exacerbate this trend. Centralized stablecoins are built to get into as many hands as possible and have spread quickly throughout DeFi as a result. On the other hand, overcollateralized stablecoins, constrained by their design, have lagged behind and failed to achieve the same level of adoption.

While it’s positive to see stablecoin adoption, regardless of who issues them, it’s important for DeFi to offer a competitive decentralized stablecoin that can stand on its own two feet and put the…