Part one of a two part series
For those of us deeply involved in crypto, there’s no question that DeFi is going to eat the financial world. But just like networking infrastructure in the 90s had to be built out for the web to be usable, lots of infra has to be built out for DeFi to be usable for the average person. The infra build out will be a slow, arduous process, but fortunately the right primitives exist now to enable the average person to invest in DeFi in a safe and user friendly way. Already we are seeing the emergence of dashboards and smart wallets that integrate different tools and curate specific DeFi protocols so that their users have as best an experience as possible. However, the app layer is still wanting and there are still significant gaps missing in even the best DeFi hubs. Until these obstacles are mitigated and consolidated into one uniform experience, users will continue to be dissatisfied with current offerings.
Fees and Delays
This is arguably the biggest obstacle and the number one reason why Ethereum is currently undergoing severe growing pains. High fees put off new users who may simply want to test the waters with a small amount of money. If fees for simple swaps cost $100, and users have less than that to spare, then they will be extremely hesitant to participate in the ecosystem. In addition to high fees, transaction times can turn from an estimated minutes to hours or even days if congestion suddenly spikes and sustains itself at high levels. Moreover, failed or reverted transactions still cost money, so it’s possible for a user to spend several hundred dollars on a single action without it ever being confirmed on the blockchain!
DeFi is complicated and full of “rug pulls” where the capital locked in an entire DeFi protocol may be drained by either hackers taking advantage of an exploit or by the developers themselves wishing to exit scam. What’s worse, it’s impossible to predict when or how a protocol will be exploited, who will be affected, the extent of the exploit, which protocol will be exploited or what ripple effects that will have on other protocols. The DeFi space is changing so rapidly and there is so much misinformation that even if one is being conservative it’s possible to be persuaded into making poorly timed, costly decisions.
High yields are attractive but not if those same high yields rapidly collapse (especially if the collapse in yields is not commensurate with a de-risking of the platform). It is easy for new DeFi protocols to advertise glitzy interest rates of thousands per year, but what these advertising campaigns fail to disclose time and time again is that these yields often collapse the moment it becomes a crowded trade, sometimes so quickly that fees become more expensive than the value of the yield. Most users do not want 1000% APY one day and 1% APY the next, they want yields that are both favorable and fairly consistent. They also want yields they can trust, not falsely advertised APY figures.
A black swan is an unanticipated event that can have dramatic consequences. Black swans occur all the time in DeFi, a good example of one is “Black Thursday” in which Ethereum’s market capitalization halved overnight which in turn instantly liquidated billions of dollars worth of positions. Black swans are difficult to hedge for because, by their very definition, they are difficult to predict both in terms of timing and in terms of their nature. Lamentably, many users fail to prepare for black swans until it is already too late, turning a single bad financial decision into a potentially life destroying event.
Uncertain tax implications
Tax laws vary wildly by jurisdiction. Some jurisdictions simplify tax laws by only charging a yearly wealth tax. Other jurisdictions do not tax crypto-to-crypto transactions or may not tax capital gains at all. But some countries have incredibly onerous regulations that count every crypto to crypto transaction as a taxable event, forcing users to track and calculate every DeFi interaction. For users that have thousands of DeFi transactions, they may find themselves needing to pay for either expensive crypto tax services and/or spending days calculating everything themselves.
Almost all DeFi users are paid in fiat first, not in crypto. This means that, if users want to start using DeFi, they need to go through the trouble of depositing money from their bank into a local exchange. This process can take days or even weeks if there are problems routing money to the exchange. Sometimes the less reputable exchanges are hacked and its owners disappear without making users whole. Other times the available liquidity for certain crypto-fiat pairs is abysmal. Exchanges require cumbersome KYC processes that can take weeks and some exchanges are not allowed to operate in or service individuals from certain countries due to local regulations.
Why bother with DeFi when one can just passively hold onto Bitcoin? To make the risk-reward ratio of DeFi attractive, there needs to be a way to properly benchmark a portfolio or a strategy against other assets. Most portfolio trackers track an investment strategy’s performance but not one’s actual invested money. Other portfolio trackers track the value of one’s total crypto assets over time but do not provide any additional info to benchmark against. All of the necessary data exists to give users the necessary tools to make wise investment decisions, but it needs to be consolidated into one UI so that they do not need to manually calculate everything and pull data from multiple different sites.
Uniswap or Sushiswap? 1inch or Kyber? Aave or Compound? Synthetix or UMA? The sheer amount of DeFi primitives available overwhelms and confuses new users, which is only made worse by the fact that these protocols have token holders with a vested interest in creating misinformation against competitors. The educational content is out there, but it targets varying levels of expertise and is scattered across dozens of different mediums. Simply put, there is no credibly neutral trusted source with unbiased information that fairly evaluates protocols in a way that lay people can understand.
Surely there must be a single easy to use hub that solves all of these pain points and consolidates everything, right? Surprisingly, there is a scarcity of suitable app-layer options. But Athena Finance is cooking something up delicious.
Stay tuned for part two! In the meantime, join us on our journey at: