You may have heard of Bitcoin and cryptocurrencies. If there is anything more exciting than the recent meteoric rise of the price of Bitcoin, it is the invention of Decentralised Finance or DeFi for short.
While the word “decentralised” may immediately propel your newest tech project into the realm of other exciting and novel tech developments, it does not necessarily make the tech the better way of doing things.
For one, DeFi lending may be the latest victim of this decentralizing craze. I think that loans and credit should not be decentralized.
If DeFi is immutable, secure, and transparent, does it mean that the security operations of conventional banks are going obsolete? For that matter, is the SOC as we know in banks no longer needed?
SOC stands for Security operations center, and it is an integral part of banks in maintaining security and event response.
More fundamentally, the question is whether DeFi is truly secure.
Defi, at its current implementation, will fail because of its very nature of being decentralized. Being decentralized will make lending uninsured. Unlike a bank fraud, a victim of DeFi fraud cannot seek compensation or help from a central management to stem the transaction.
That is a breeding ground for fraud and mistrust.
I work in a bank SOC where a group of blue team cybersecurity professionals works round the clock to protect customers and employees from bank frauds. I can confirm that fraud cases in finance are innumerable. Where there is money, fraud can only grow.
Dealing with DeFi is almost as good as funding illicit borrowing and exposing oneself to unmitigated risks.
When one finally finds himself caught in the middle of a DeFi fraud, unlike a bank, he cannot seek help or call customer service to retrieve the lost cash. Think about that. If that is not disconcerting, then at least it is an entirely alien way of doing banking.
DeFi may be in its infancy, but it is looking like DeFi is set to disrupt the FinTech space. For one, the invention was conceived on truly virtuous aspirations.
Ironically, DeFi companies prey on the get-rich-quick desires of every working-class adult. They borrow the “decentralised” tagline to appear safe when in fact they are the very opposite. Because of this, DeFi appears to explode in growth and hype.
More than once, DeFi companies have been exposed to exit scams amongst other pyramid schemes that serve to benefit the few creators. Expect more to wither out as the hype wears down.
Of course, not all DeFi projects are bad projects, like Aave which shows some promising outlook. At its current state, DeFi does not have my vouch of confidence. I would err on the safe side and stay off the lane for this one.