Everyone is taking notice of decentralized finance (DeFi) these days. Governments, institutions, retail investors, people blocked from the financial system in capital-controlled or unstable economies…your grandma, probably.

Just about everyone is taking notice of the hottest ecosystem in the crypto world. But not all watercooler commentary on DeFi is completely accurate. That’s expected in such a new and growing space, so we’re here to bust some myths for you and clarify what is fact and what is fiction when it comes to DeFi.

Decentralized finance origins

It may not be obvious to everyone, but all of the new innovations and services under the “decentralized finance” umbrella are really just cool new implementations of crypto.

The concepts and ideas that brought cryptocurrency into existence are the same foundational principles underlying DeFi: decentralization, security, elimination of permissions, and trustlessness.

Sure, there’s refreshed enthusiasm in the idea of unseating traditional financial services, but Bitcoin has been trying to DeFi OldFi since day one, when you really think about it.

Yes, it’s true that DeFi went absolutely parabolic in the summer of 2020. Billions of dollars flowed into DEXs, lending platforms, liquidity pools, and NFTs. But just because that’s when the kite caught wind, doesn’t mean it hadn’t been poised to take off well in advance. The term DeFi was coined back in 2018 and MakerDAO, which was founded in 2017, was arguably the first DeFi lending platform.

Who's in charge of Defi?

Even though dApps and services in DeFi are mostly non-custodial and permissionless, if you’re doing everything above board, you will have used a centralized exchange to obtain your crypto in the first place. Most DEXs only trade crypto-to-crypto, so getting your hands on some requires a fiat-to-crypto on/off ramp. The exchanges dealing with fiat will, of course, be complying with regulations so that the government can get its tax dollars off your crypto profits.

While the peer-to-peer and permissionless nature of DeFi makes it very hard to regulate (more on that later), the end-user can’t completely escape regulation. Unless you’re doing something sus, you’ll have to comply with some regulations—and so will more and more projects in the future. 

In many ways, crypto is still the wild west of fintech. But lawmakers are coming for the space as quickly as they can. The SEC has been conducting plenty of investigations, made several charges, and even shut down some platforms.

One of the core ideas driving the philosophy of decentralized finance is removing intermediaries and uncomplicating government involvement (regulation) in financial transactions.

But that doesn’t mean all DeFi users want complete regulatory anarchy.

Many would like to see some regulatory clarity, if only for the purpose of smoothing the creation and release of new projects. Most developers and users would rather get into the projects themselves, instead of spending hundreds of hours dealing with regulators on what they are or are not allowed to do. Clarity would help with this.

DeFi's Not a catchup—a paradigm shift

Since decentralization creates open, borderless, and trustless financial services, conducting transactions across countries and, often, on platforms without top-down governance, it’s very difficult to hold any single person or entity responsible if laws are violated. Especially since cross-border transactions may be subject to laws in different jurisdictions.

It’s not just a matter of lawmakers hurrying up to make new laws and regulations that encompass DeFi. Crypto is a completely different animal and there’s no “catching up” to it since it completely changed the financial paradigm by removing intermediaries.

Theoretically, the smart contracts and platform protocols are the new “intermediaries” of DeFi. Because they’re open-source, they’re much more transparent than traditional intermediaries who need to be regulated. The only problem remaining is that codes can be buggy or malfunction.

In traditional finance, regulations are imposed on the intermediaries between customers and businesses. By completely eliminating those trusted middlemen, there is no one to regulate in the existing law construct. And some regulation proponents argue that disintermediation should shift regulation to the users, not the platforms or developers.

The black market vs global market argument

DeFi tools may be an investment and a thrill for those in large developed economies like the US and European countries, but some of the fastest adoption is coming by necessity. People who are unable to access the financial economy through traditional permissioned services are finding a wealth safe-haven in DeFi. People in China, for example, are flocking to DEXs as the CCP’s banning ratchet is ever tightened.

The argument was a little easier to make back in the Silk Road days of the early 2010s before Bitcoin became a global phenomenon. But today, the majority of people with crypto and DeFi exposure are investors, not criminals.

At least, let’s hope as adoption rockets up by the millions, there’s not a one-to-one relationship with criminals!

It’s not just retail investors grasping for hope in the face of inflating and doomed fiat currencies who are diving in. Decentralized finance has made such big waves in the global economy that institutions, banks, and brands are even getting involved. 

Another excuse thrown around to dismiss DeFi is the idea that only reckless, naive speculators in a desperate hope to get rich quick on DEXs or become liquidity providers. It may take nerves of steel to trade up-and-coming altcoins on a DEX, but innovators and early adopters are learning how to hedge risk as fast as the ecosystem is evolving.

Innovations on the DeFi horizon

Automated finance becoming AI finance is on the horizon. AMMs are a really cool step in automating how we trade on DEXs, and liquidity pools are another exciting opportunity in DeFi. But coupling them with machine learning and AI, they’ll become even more mind-blowing.

Like with any high-risk investment, you, the prudent investor, will DYOR (do your own research). High-risk is high-risk. But that doesn’t mean all DEXs are sketchy or that all new projects are rug-pulls. Taking responsibility away from intermediaries necessarily puts that responsibility onto the investor, so proceed accordingly. 

As we discussed earlier, even if you don’t hold altcoins as a store of value, they have their purpose. Decentralized finance is the tip of the spear when it comes to innovation in financial services. Everyone and everything is running to keep up with the breakneck pace that is decreasing trust in intermediaries and increasing personal control, possible returns, and information security.

Bitcoin maximalists will argue this until the cows come home. And, of course, depending on how you look at it, there’s a case to be made for it. However, if you’re excited about new fintech and how new use cases can be developed, not all altcoins are shitcoins.

There are some exciting, innovative projects happening in DeFi, whose purposes are not the same as Bitcoin’s…and that’s awesome.

What’s Next for DeFi?

We’ve organized these facts and fictions today, but you can be sure there will be more tomorrow.

If you haven’t already dipped your toe into the crypto waters, it’s not too late and you can continue learning about how to DYOR. Whether you’re an experienced and knowledgeable investor or just starting on your journey, you’ll never be bored in the DeFi ecosystem.

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Michael Hearne

Michael Hearne is the CEO of Decentral Publishing and the host of the Uncensored Crypto docuseries.