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Authored by James Moreau, co-founder Jet Protocol
Emerging decentralized financial technologies are instigating a forced evolution in the way we view finance, at both the institutional and personal levels. By changing the control of banks or other centralized entities, DeFi offers a cheaper, faster, more efficient and transparent way of accessing and utilizing value. Built on automated smart contracts that give users the capability to directly control assets and work 24/7, 365 days a year, with 100% uptime and no staff, the upside of DeFi when done properly is tremendous.
The creation of a financial system that is more advanced and accessible than anything that has come before it has rightfully created a tsunami of excitement that has swept up countless innovators, builders, and investors from all backgrounds across the globe.
There is vast potential in this vein of innovation, but no technological revolution has ever happened smoothly, and the decentralization revolution is certainly not an exception.
The Path of DeFi’s Evolution
Although it is still in its infancy, the DeFi landscape has gone through many radical changes and will continue to do so, as it must in order to realize its full potential. In the early stages, the industry consisted mostly of borrowing and lending platforms such as Aave and Compound, where lenders would earn rewards for the liquidity they provided, and borrowers acquired capital at interest rates much more attractive than in traditional finance.
Next came the automated market makers and decentralized exchanges (DEXs) like Uniswap, which helped balance the capital efficiency of protocols. As these protocols introduced governance tokens, the potential of yield farming and liquidity mining were increased tremendously. This evolution created widespread excitement, and attracted a great deal of investment from across the world. The prospect of a better financial system that was neutral of biases and efficient beyond human capability served as a shining beacon for investors and builders who wanted something better than what the market had to offer.
However, in recent times, the effects of human vices such as greed have corroded some of the foundational pillars of the industry, and this decay has been put on full display. In light of the ongoing market crash, now is an important time for those involved in the DeFi space to revisit both the fundamental principles, and potential risks associated, with decentralized finance.
It is imperative to build responsibly and to be transparent with the public when creating new financial tools and products. Too often in DeFi there is an act now, think later sentiment that is adhered to by project leaders, and then parroted by those who have bought into the project, regardless how much they understand what they are saying or doing.
These actions have consequences that affect everyone involved, and lately the consequences of bad actors and poor investment practices have been laid bare.
Educating the Masses on Proper Use of DeFi
If you’re building financial software, of any kind, decentralized or not, it is your duty to educate people on what it is they are using and how to use it properly. Financial literacy is a crucial set of skills to have along with the mindset of patience and diligence. Financial literacy is a process and a commitment.
Too often in the DeFi space there are irresponsible actors taking advantage of market excitement to offer investors unrealistically high returns, and too often there are investors throwing care to the wayside in a freewheeling bid to tap into these unrealistic profits.
While market downturns are painful and cause more than just financial losses, this one especially, downturns are an opportunity to get serious – learn and build in order to position yourself or your project to be successful when things inevitably turn back around. There are many projects out there with responsible and committed teams that are dedicated to innovation and building the tools that will power the digital financial system of the future in a patient and diligent manner. This dedication will continue to drive groundbreaking work, regardless of market conditions.
What Comes Next?
Innovation is a constant process, and although it may not always be glamorous, developers and teams that weather the storm and stay committed to responsibly building great products are the ones that succeed and benefit users, whether retail or institutions. The same holds true for investors. Now is a time to learn, so that mistakes are not repeated, and lasting success can be built.
One important aspect to further focus on and learn from are the dynamics of counterparty risk in DeFi. DeFi allows individuals to transact directly with each other due to the decentralization of the technology. This has clear benefits. It also means there is less room for error. People should always exercise caution and due diligence when involved in any financial transaction. These principles should be even more consciously exercised when operating in DeFi. The level of knowledge and prudence someone must have to effectively interact with DeFi remains high, and therefore requires more of those building in the space.
So now, as we face the uncertainties of yet another bear market, investors and builders have every right to be fearful. But I challenge those individuals to look at this moment in time as an opportunity – an opportunity to build, act, and educate, responsibility. By doing so, we as a community can come out of this market turmoil stronger, and create a better future for decentralized financial systems and, to the main point, benefit society.
James Moreau is the Co-founder of Jet Protocol: an open source, non-custodial, borrow and lend protocol on the Solana Blockchain pushing the envelope on decentralized finance and debt capital markets efficiency.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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