Core to the decentralized finance (“DeFi”) movement is an open-source code where the implementation of contributed code is operated by Ethereum and its decentralized network. Ethereum is a global, decentralized platform that brings value to the internet.
- Value can be transmitted minus third parties. (Miners)
- Value can be subject to code without centralized intermediaries. (EVM)
Currently, the code is available on Ethereum blockchain for multiple purposes, like borrowing, lending, investing, saving, and trading. The DeFi stack is building, but users are quite a few. The development to date has been upheld by various investments, like:
- Token fundraising (1, 2);
- Venture investments (1, 2, 3, 4, 5, 6); and,
- Grants (1, 2).
However, with the limited runway, more business models are required for sustained development, testing, and user acquisition.
Though DeFi’s philosophy is categorised by the elimination of central authorities, I doubt whether it will survive without them. DeFi as a sector resembles the internet; this regards moats that are based on quality and cost-effective centralized services. A proven formula: centralized businesses built on decentralized infrastructure.
Centralized companies must be transparent around:
- Any extra fee (over gas fees)
- Any added trust (over smart contract risk)
If valuable services are coupled to the above values, a fee seems warranted. There are at least four, distinct layers to Maker’s DAI:
- Layer 1: smart contracts
- Layer 2: incentives
- Layer 3: integration
- Layer 4: user aggregation
Let us assume Maker’s Layer 1 is already complete (the black lego in the picture below). That is, no more changes are made to the smart contract infrastructure. Now,
Layer 1 developer efforts can move up the stack to contribute to Layer 3 or Layer 4 solutions.
Network impacts will start to compound at the above layers.
Layer 2 is the incentive layer of Maker’s system (yellow legos in the picture) and different stakeholders form here: MKR holders, DAI holders, keepers/arbitragers, researchers, modelers, and so on. Work for the system is rewarded here via crypto-economic incentives (like DSR, DSF, and MKR) and market-based incentives (e.g., DAI arbitrage).
Layer 3 is the “plugin” layer where DAI is integrated into other DeFi protocols for exchange (e.g., Uniswap), lending (e.g., compound), and various other purposes.
Layer 4 is the user aggregation layer of Maker’s system (InstaDapp’s white lego in the picture above). Layer 4 is the landing page for new users. Aggregation features ought to be non-custodial and address several user demands that are not met at the protocol level. Again, fees should be anticipated here for quality services.
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With just thousands of users today, it is clear that deploying the smart contracts alone won’t reach a broad audience. There must be powerful tools and resources surrounding the smart contracts to make DeFi protocols accessible, intuitive, and useful. We are not there yet, but momentum is building and sustained, centralized support is required.