DeFi's Sticky Future

Innovations tend to stack. And there's nothing more stackable than composability and interoperability involving money.

AccessTimeIconJun 3, 2021 at 4:24 p.m. UTC
Updated Sep 14, 2021 at 1:05 p.m. UTC
AccessTimeIconJun 3, 2021 at 4:24 p.m. UTCUpdated Sep 14, 2021 at 1:05 p.m. UTC
AccessTimeIconJun 3, 2021 at 4:24 p.m. UTCUpdated Sep 14, 2021 at 1:05 p.m. UTC

When we look back now upon the growth of the cloud computing industry, it was the arrival of cloud storage in 2006 that marked the transition from interesting new technology to essential, high growth industry. The tipping point was the creation of a simple, scalable and very useful service that could be easily plugged into existing tech start-ups. 

The world of blockchain will be no different. Every industry must have such a tipping point where the product goes from curiosity to genuinely useful, which will trigger a shift from experimentation to mass adoption.  When we look back at what event separated the early era of blockchain experimentation into the era of rapid adoption, it will be the arrival of decentralized finance (DeFi).

Paul Brody is EY Global Blockchain Leader. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.This is a guest essay published first in The Node, CoinDesk's daily roundup of the most pivotal stories in blockchain and crypto news. You can subscribe to get the full newsletter here

What makes DeFi similar to cloud storage is the way it delivers two things we did not really have before in the world of blockchain: useful smart contracts and interoperability. Note the emphasis on useful here, because token standards and smart contracts were available before, but it wasn’t until they were applied to DeFi that we could see a real-world case for their value proposition.  

In the same way that cloud storage could suddenly give a startup infinite storage capacity by plugging into an existing application, DeFi did the same for financial operations. Want to buy and sell in dollars? Stablecoins can be used anywhere. Want to set up a lending operation? You don’t need to build your own stablecoin, because you can use any of the digital currencies already out there – ERC-20 tokens, the standard for digital assets on the Ethereum blockchain, are all (theoretically) interoperable.

DeFi may prove to be particularly powerful because once people start using it, they will find it hard to stop as it gets woven into more and more of their daily business and personal activities. This is driven from the nature of DeFi innovations, which build atop each other, and how those innovations, in turn, will yield further innovations.

The process is happening right in front of us. The original building blocks of DeFi were algorithmic and fiat-backed stablecoins like MKR and USDC. From there, it was a direct step to lending and deposit contracts. The first innovation built on those innovations was yield farming, where smart contracts actively seek out the best return for your assets.  

If DeFi is successful, its future is invisible, automatic and essential to every enterprise.

The world of DeFi will get bigger and stickier as off-chain assets are integrated. The European Investment Bank’s decision to issue digital notes on the Ethereum blockchain is just the start. However, stickiness isn’t just more assets or different types of assets and services, it is integration into automated business processes. Individuals and companies will start to plug their cash flows and assets into DeFi ecosystems as a routine part of their personal and business financial processes.

The most immediate example I am hoping to implement is the integration of the enterprise procurement process into DeFi. Specifically, I want to tokenize and then integrate purchase orders, receivables and product inventory. A seller should be able to obtain working capital against the value of the purchase order, and then once the product has shipped, obtain early payment on the receivables as well. At any time, companies should be able to borrow against the value of their inventory to unlock working capital.

To get there, there are a few sticky problems that need to be solved. First and foremost, companies do not want to share the identity of their suppliers or the prices they pay with the general public, so privacy is essential. At the same time, the credit-worthiness of the buyer and the history of the seller’s reliability are extremely important in pricing the credit being offered. I believe there is a big role here for zero-knowledge proofs to do things like prove the long-term payment record without sharing buyer or seller identity.

Assuming we can get past these problems, I expect the injection of DeFi into the enterprise workstream to be not only quick but very sticky. If you can unlock working capital in an automated way, why do it only once? Indeed, why not just build the workflow into your systems and do it with every single purchase order and invoice? Processes like this will make cash flow much more reliable and automatic for companies.

Once these types of automatic integrations are completed, they tend to stick around. The average piece of enterprise software stays in place for between six to eight years and automated processes that are plumbed into the software tend to stick along with those systems. This is also increasingly true for individuals. I have been using since it was founded in 2011. I rarely log in, it just works in the background, connecting up my different systems with pre-set and programmed automations.

If DeFi is successful, its future is invisible, automatic and essential to every enterprise.

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