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What DeFi Needs to Mature Into a Thriving Ecosystem

What DeFi Needs to Mature Into a Thriving Ecosystem
By Vin Narayanan
Date December 2, 2022

Crypto Market Musings

There are two things driving the market right now: FTX collateral damage and potential interest rate hikes. Every time an FTX domino falls — like BlockFi declaring bankruptcy a few days ago — crypto prices fall. But crypto prices have been rallying on the news that the Fed will shift to smaller interest rate hikes as it tries to bring inflation under control. As of this writing, bitcoin is trading close to $17,000, and ethereum is trading close to $1,275.

This push and pull will likely continue over the short term. There will be more FTX dominos to fall (speculating is irresponsible, but there are a few that we’re keeping an eye on). And if it looks like progress is being made on the inflation front — and the economy doesn’t go completely in the tank — investor confidence will pick up.

That makes the bottom of the market incredibly hard to predict. From a macro standpoint, it feels like we’re getting closer. From an FTX standpoint, it feels like we’re far away. It’s incredibly frustrating. But that’s crypto. I believe the market will rebound at some point next year. The key now is finding buying opportunities while the market sorts itself out. (Click here to sign up for First Stage Investor and get information on potential spots to buy into a crypto position).

What Vin Is Thinking About

Almost a year ago, I spent a few days hanging out with some massive money managers and hedge fund types. And they all missed the credit markets from the late 1980s and 1990s. These markets were crazy, incredibly risky and enormously profitable. They’ve also largely disappeared due to a combination of regulations designed to eliminate risky trades and an extended period of incredibly low interest rates (until recently) and incredibly low inflation (until recently).

Decentralized finance (DeFi) reminds me a little bit of the credit markets back then (well, at least the parts in the mid-1990s when I was starting my career). DeFi has its fair share of relatively simple financial instruments that can generate income streams. But it also features some incredibly complicated and risky financial instruments as well. And when you combine complicated and risky with leverage, things can spiral out of control quickly when something bad happens.

Many of the problems we’re seeing right now in the crypto markets are what happens when a massive failure scores a direct hit on the intersection of lending and leverage. The DeFi system, much like credit markets of the past, is dealing with shock poorly. And if DeFi is going to mature into a robust ecosystem, it needs to be more resilient in the face of adversity.

And Finally…

Tired of talking about Sam Bankman-Fried and FTX yet? If you are, hit me up on Twitter (@vinistic) and let me know what you’d like me to write about.

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