Token 2049: Does DeFi still have a future?

Decentralised finance is something that many people see as core to the crypto space. After all, DeFi is, in many ways, the crystallisation of the ethos of decentralisation that is the foundation of the crypto space.

Yet, this space is under threat. Last month, the total value locked in DeFi protocols almost hit a two-year low, as users pulled money from decentralised exchanges to put into safer investments.

However, not everypone has given up on the DeFi space. At this week’s Token2049 conference, held in Singapore, experts in the crypto space were invited to talk about the state of the DeFi industry, and the challenges that the industry faces.

Panellists included Julian Koh, Co-Founder and CEO of Ribbon Finance, Jeff Yan, a contributer at Hyperliquid, Cindy Leow, Co-founder of Drift Labs, and Suyang Yang, Principal at Circuit.

DEXs face a liquidity problem

Despite many people recognising how important Decentralised exchanges (DEX) are to the idea of Web3 and decentralised finance, transaction volumes are still dominated by Centralised exchanges (CEX).

The main problem, according to Julian, is a lack of liquidity within DeFi. Since DEXs are essentially P2P marketplaces for trading tokens, the amount of liquidity available is highly dependent on how many people are willing to trade in a particular token.

The problem is also compounded when we consider that CEXs often trade mainstream tokens, and leave only niche tokens to be traded on DEXs.

As a result, traders new to the DeFi space using a DEX for the first time will often experience high slippage when trading, which in itself can turn people who are used to the comparatively smoother experience of trading on CEXs away from DEXs.

That being said, Julian also noted that since the collapse of FTX last November, traders are also wisening up to the fact that CEXs are not necessarily safe as well, and have begun to pay more attention to DeFi.

UI matters

However, the panellists also noted that part of the reason why users don’t always stay on DEXs is that quite often, the user experience for them is not exactly the best. Jeff pointed out that quite often, DEXs have bugs that make the trading experience quite frustrating.

“Many people who come to DeFi and use a DEX for the first time really don’t enjoy their experience. Especially if they’re used to the smooth trading experience that CEXs offer, the UI and UX that they see on DEXs can be extremely frustrating, to the point that trading on DEXs becomes something totally unacceptable to them.”

Cindy echoed these sentiments as well, and pointed out that these problems could also be interlinked. The high slippage that traders experience on DEXs due to low liquidity also contributes to part of the reason why people find trading on DEXs so frustrating.

Additionally, she points out that setting up an account on DEXs is often a long and drawn out process that can take several days, while the same process can take minutes on CEXs.

As such, she feels that its important that DeFi protocols improve on this front, and that market makers will be an important part of the DeFi ecosystem as liquidity providers.

DeFi has a USP

Despite these problems, the panellists remained confident that DeFi and DEXs were here to stay.

The key reason for this was because DEXs do provide services that CEXs do not.

CEXs are selective about the tokens that they list on their exchange, while DEX peer-to-peer marketplaces mean that there are a far wider range of tokens being traded on DEXs rather than CEXs. Consequently, there will always be reasons for people to use DEXs, especially to trade tokens that are not available on CEXs.

Additionally, the panellists pointed out that in recent months, enforcement agencies have begun to crack down on CEXs, and this has resulted in CEXs cutting services from certain regions. DEXs on the other hand, are not receiving this level of scrutiny yet, and the panellists believe that these actions could push more people towards DeFi.

The collapse of FTX could also prove to people that CEXs are not really as secure as they seem, since customers still rely on this centralised entity to hold their tokens, and customers are not always aware of what is going on within the CEX itself. In other words, now that the risk of being rugged by a CEX is becoming real, DEXs, where rugs are less possible, may reap the benefit of such fears.