DeFi, or decentralized finance, finally found its footing this year, with numerous DeFi tokens and protocols gaining widespread traction amongst crypto users. Powered by smart contract technology, innovations like yield farming have allowed everyday users to earn unprecedented interest on their crypto assets.
DeFi is booming, and today the market is filled with all kinds of borrowing and lending protocols, many of which compete with one another on the basis of providing users with meteoric yields. It’s not uncommon to see protocols advertising double or triple digit interest rates – a far cry from the ~0.5% interest rates commonly seen on so-called “high-yield” traditional savings accounts. While many of these protocols will prove to be unsustainable, make no mistake: Look back in a few years, and it’ll be clear this emergent wave of protocols have set larger forces into motion.
Changpeng "CZ" Zhao is the founder and CEO of Binance, which operates the largest digital asset exchange by volume.
Today’s most promising DeFi apps all share a similar vision for the future: The creation of a divergent financial system where capital and data flows more equitably, shifting control away from institutions and towards the individual. However, there isn’t a straight path from point A to point B. The most popular DeFi apps are still dwarfed by most centralized exchanges, which wield outsized impact and influence within the cryptocurrency and blockchain space. The best centralized exchanges offer a compelling mix of user-friendly services that are more easily understood by end-users.
For instance, our cryptocurrency exchange, Binance, offers a comprehensive suite of financial products that mirrors those found in traditional markets. Users can buy, sell and trade crypto, choose options and futures trading, apply for crypto loans, earn passive income and more with a single login. These centralized products are easy to use and comprehend, and can be accessed using a web browser, desktop or mobile app. At earlier stages of development, it’s also easier to increase the pace of innovation with centralized technology, as teams can work in concert to build new features, fix bugs and produce the kinds of fine iterations that improve the overall user experience. By focusing on delivering a superior user experience in tandem with top-notch security, centralized exchanges essentially live or die based on their ability to “create trust” among their users.
Trust also happens to be the major battle DeFi must win to reach mainstream success. Users primarily care about three things when it comes to financial products: liquidity, security and stability. These are the characteristics that enable trust (and reliable earnings) to take place. Whereas today’s DeFi protocols can be notoriously difficult to understand and access, over the years, centralized finance (CeFi) platforms have gradually become more accessible and multi-dimensional, with sophisticated order-matching engines, asset custody and stable technology.
These characteristics are telling because they reflect the crypto exchange’s raison d’être: to promote market and industry construction. CeFi’s concerns start and end with the building of mature infrastructure for the future of the crypto market. Once the foundation is in place, the platform itself takes a back seat to the diverse and innovative applications being built on the platform. Rather than driving the market as innovators, centralized exchanges will gradually settle into a role as an infrastructure provider for trailblazing projects. Ultimately, centralized exchanges are a transient product that will provide users with a bridge to the world of DeFi.
Here’s what we think will happen next: CeFi players will continue to lower the barriers to entry for DeFi and DeFi-like projects, allowing their users to sample the benefits of DeFi, while retaining the liquidity, security and stability the users are accustomed to with CeFi offerings. Once these proof-of-concept projects are “verified” by the market and the DeFi model proves to be successful, then market demand will follow.
Today, Binance users can access DeFi-inspired products like staking, lending and pooling services. In addition, we are committing a $100 million accelerator fund for DeFi projects on Binance Smart Chain (BSC), a smart contracts-enabled blockchain that allows developers to build decentralized apps and digital assets. Among the wave of inaugural DeFi projects that debut on BSC, there’s a chance one of them will become the next “killer” application.
It seems we’ve already reached “the turning point” when it comes to DeFi adoption. After all, the enduring appeal of financial self-custody and decentralization are central to the original promise of blockchain technology. It has the capability of increasing the freedom of money for all who participate, bringing financial opportunities to more people than ever before. As such, DeFi provides the terminal trajectory for the future of crypto.
However, it will need help from CeFi platforms, which will be, for many users, the gateway through which they access DeFi for the first time. We believe the future of the industry lies in decentralization, and with the momentum increasing, it’s time to go all-in.