A future where DeFi and CBDCs can work together


Decentralized Finance (DeFi) is changing the way people around the world think about money faster than any previous financial revolution. Banks that have monopolized access to money since ancient times are finally seeing their status being questioned. Now it is DeFi that offers an alternative that could turn the economic landscape upside down and democratize access to finance.

This seismic power shift away from governments and banks to real people is long overdue, especially in developing countries where DeFi is already emerging as a remittance and small credit tool. Financial inclusion is another significant benefit DeFi can offer, especially when 1.7 billion adults do not have a bank account.

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The growth of the DeFi space is staggering. By adopting concepts from traditional finance and transforming them into transparent protocols through smart contracts, DeFi provides a trustworthy ecosystem that offers everything from insurance to loans to savings accounts. The appeal of DeFi is evident as the total value of the assets held in DeFi financial products exceeds nearly $ 175 billion.

However, as DeFi is on the rise and governments and banks do not want to lose control of the monetary system, they are turning their attention to the issuance of digital currencies themselves. Central bank digital currencies (CBDCs) are seen as a way to gain control of the monetary system while providing users with faster, cheaper transactions. If we fast forward to 2030, what elements of decentralization can we expect in our everyday lives?

DeFi in the future

Imagine the year 2030. Célia, a young Parisian, pulls out her cell phone to buy a Eurostar ticket from Paris to London. When she reaches the payments screen, she selects her primary digital wallet. When she switches to her wallet, Célia notices that her digital euro balance has gone down. Nobody holds money these days, as loans can be taken out and repaid depending on the value of their own assets in their wallet and repaid automatically over time.

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While DeFi will play a major role in 2030, CBDCs will also play an important role, which have become the standard tool for banks around the world. China leads the way when it comes to the success of its previous attempts. However, they tend to be more state oversight, scrutiny, and censorship. As a result, DeFi has become the primary way people who value freedom manage their finances and now underpin the world financial system. And because of the popularity of DeFi, we’ve moved away from bank accounts so that we can access and use our money anytime, anywhere, and borrow when we need it.

Cryptocurrency’s goal of making money universally available worldwide means that the underlying DeFi protocols will provide liquidity for swaps, borrowing, and borrowing. And despite the complexity of DeFi, end users are not aware that they are interacting directly with these global sources of liquidity as complete privacy is guaranteed on all DeFi and spending.

In addition, we process all international payments on Layer 2 Zero-Knowledge Proof Rollups (zk-Rollups), a scaling solution that bundles hundreds of transactions outside the chain in an Ethereum Smart Contract and thus helps to reduce the overloading of the blockchain. A cryptographic proof, known as SNARK, is created to ensure the validity and is published on layer one. In order to provide free and open alternatives to government money, Bitcoin (BTC), Ether (ETH) and stablecoins without permission are issued and immediately exchanged for all important government coins.

Beat the challenges of DeFi

The way DeFi goes, this is certainly a plausible future. Ultimately, however, there are some hurdles to overcome in order for DeFi to achieve what many believe is a utopian future.

One area to consider is the barriers to wide adoption. For example, the vulnerability of smart contracts, the unpredictability of the DeFi market, regulatory problems and the accessibility to new technologies.

Others focus on the space being too complex for the average trader or investor. And the inefficiency of the blockchain is an issue that needs to be addressed, particularly in terms of energy consumption and the cost of transactions on Layer 1 protocols on the blockchain. While alternatives have so far made compromises in terms of security, technological solutions in the early stages are coming to the fore. Examples of this are ZK-secure cryptography or layer two solutions that pack more transactions into space and thus reduce costs.

Of course, some of DeFi’s challenges cannot be mentioned without talking about the naysayers. Dan Berkovitz, Commissioner of the Commodity Futures Trading Commission (CFTC), for example, thinks DeFi is a “bad idea”. And Tom Mutton, the fintech director of the Bank of England, had said that any CBDC was “ten times more efficient per transaction” than Bitcoin. However, one has to ask oneself whether he realizes that zk rollups are already 1,000 times more efficient than Bitcoin?

What is DeFi doing to overcome these hurdles?

More education is needed. The DeFi Education Fund is an example of an organization trying to educate policy makers about the benefits of the DeFi ecosystem and help create a regulatory framework for it. To improve knowledge about DeFi, it funds applicants who work on DeFi research and advocacy in legal research and DeFi practices, among other things. With an improved understanding of DeFi, mainstream adoption will become easier as new users are brought on board.

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Another way to increase the number of users is to improve the user experience. This can already be seen in Layer 2 protocols that build wallets and infrastructures that support DeFi. In this way, they avoid frictions and costs, and provide users with better ways to recover lost keys while making the space less complex.

In the long run, however, regulatory clarity is something that gives trust to traditional securities service providers such as banks and institutions while creating a way to allow users to access DeFi on their terms within existing apps. The great thing about it is that many customers don’t even know they are interacting with a blockchain behind the scenes, as all complex wallet interactions are hidden. It is this collaboration between traditional finance and decentralized finance that could give DeFi the boost it needs to expand further into the mainstream.

Related: DeFi: Who, what and how do you regulate in a borderless, code-controlled world?

Act now

It is clear that DeFi will stay here and could become the core of finance in 2030. However, more needs to be done today to achieve this.

Right now, it is the growing development of CBDCs that is both a threat and an opportunity for DeFi as more nations experiment with them and governments begin to adopt them. But just because CBDCs are picking up the pace doesn’t mean DeFi can’t find its place in our future world as well.

However, if people want to control their own money and know where it is coming from, while giving developing countries access to banking, then DeFi is the way to go for the future. The core elements of the DeFi infrastructure such as decentralized exchanges (DEXs), credit and credit logs, exchange aggregators that automatically find the best prices and cross-chain bridges will also be required by CBDCs in the future if these national currencies want to be able to interact with each other and be used as fully digital money.

DeFi therefore plays a role as an innovation lab, making it possible to test various infrastructure issues at breakneck speed and ensure that the right infrastructure needed by CBDCs is already available when they are rolled out globally. CBDCs that are adapting to take advantage of the rapid innovation in public blockchains and DeFi will benefit from connecting to massive pools of liquidity that will allow users, for example, to instantly switch between digital euro and Ethereum or use the DeFi infrastructure to a return on the digital pound.

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It is the CBDCs, deliberately segregated from DeFi, that will lose to private stablecoins – one of the fastest growing areas in the crypto industry. But we don’t have to rush to make this a contemporary reality. There are many hurdles DeFi must overcome before we see the type of mainstream adoption that is present in everyday life.

By 2030, our Paris friend Célia may not know or care what part of her transactions are CBDC and DeFi, and she shouldn’t care. There is still a lot to be done to make that happen. We hope that by 2030, Célia will be just one of hundreds of millions of people enjoying the bright highlands of a decentralized financial world that will forever change the way we view money.

This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, and readers should do their own research when making a decision.

The views, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect the views and opinions of Cointelegraph.

Will Harborne is Co-Founder and CEO of DeversiFi, a Layer 2 DeFi trading platform based on StarkWare’s scalable technology. Will has worked on technology consulting projects, first at Cambridge Consultants and then at IBM, before moving full-time in the public blockchain space, joining Bitfinex in 2017. There he led several projects before combining his experience with his passion for Ethereum ecosystem of license-free innovations to outsource Ethfinex. Will is a member of the Melon Technical Council – one of the first major governance experiments for a blockchain-based protocol. He also holds a Masters of Engineering from the University of Cambridge.