As an ex-banker, Alex Ryvkin brought fascinating insights and a bit of balance to the panel. With Mode, he thrives on creating an ecosystem of financial services bringing the best of both worlds: traditional finance and DeFi.

brought fascinating insights and a bit of balance to the panel. With Mode, he thrives on creating an ecosystem of financial services bringing the best of both worlds: traditional finance and DeFi. Lex Sokolin is the co-head of the fintech department at ConSensys. He’s the writer & curator of the “Future of Finance”, a newsletter addressing fintech, artificial intelligence, AR/VR and of course cryptocurrencies and blockchains.

is the co-head of the fintech department at ConSensys. He’s the writer & curator of the “Future of Finance”, a newsletter addressing fintech, artificial intelligence, AR/VR and of course cryptocurrencies and blockchains. Finally, let’s not forget about the panel’s moderator: James Bennett — CEO of Bitassist, a crypto asset research & advisory firm.

///Disclaimer: You’ll find below my (Brice from TokenCard) notes from the event, re-organised into a coherent article. Keep in mind that this was a panel discussion, and some adjustments and cuts were necessary to make it readable. This article follows the order of the discussion. I reached out to each speaker before publishing the article to make sure the content presented here matched their vision and I gave them a chance to review it.///

What brings you here? What are your main issues with the existing financial system?

Arniel Hill: Our generation is getting the worst end of the stick. We saw the 2008 crisis, the IMF blackmailing the Greek government, the rise of tuition (US) and housing prices… The system has been cracking for a long time. With cryptocurrencies, we have two options: we can either recreate the financial system as such or try to create a whole new system that wouldn’t be as painful and damaging as the existing one.

Alex Ryvkin: Rent-seeking and predatory behaviours exist in the current financial system, and they are detrimental. However, we don’t have to trash the whole system away — some parts of it are providing value; consider, for instance, the ability to borrow money without collateral, which is currently impossible with DeFi.

How do you deal with the risk in DeFi services?

With DeFi, we have markets that are transparent enough to define the lending rates by themselves. — Stani Kulechov

Stani Kulechov: Having to trust is fine. We are trusting things all the time; it’s everywhere: the current system is not broken. DeFi is not about creative destruction, but more about bring power back to the people and opening up the financial systems.

With DeFi, we have markets that are transparent enough to define the lending rates by themselves. DeFi services and open finance bring more transparency, which translates into more expertise and shared knowledge, making the risk easier to asses. DeFi opens the field to everyone.

Overview of Aave’s Decentralised Liquidity Pools (source)

With DeFi, we are now seeing the emergence of participatory systems, owned by their users. Can this lead to more efficient systems?

Lex Sokolin: “Open/Decentralised is good is a philosophical framing.” It does not lead us anywhere. Software doesn’t change human nature. Consider Artificial Intelligence: we sometimes hear that AIs are biased. They’re not — they share our bias, show us how racists/sexist we are.

Software doesn’t change human nature. Consider Artificial Intelligence: we sometimes hear that AIs are biased. They’re not — they share our bias, show us how racists/sexist we are. — Lex Sokolin

The software can’t change how people behave, but it can redistribute power among its users. It’s not all black and white, excessive centralisation is also a concern in the cryptocurrency industry: the banking industry is currently less concentrated than bitcoin mining.

What are the main risks associated with DeFi?

Arniel Hill: “We will see a DeFi industry crash within ten years from now”. So far, we are mostly reproducing the traditional finance system on chain, so we will inherit its problems. However, it’s interesting to consider the question of the risk with the framework of assets ownership. While custodial services are frequently hacked and attacked, there has been so far no successful hacks against non-custodial DeFi services. Does this mean that custodial services are riskier than non-custodial ones?

We will see a DeFi industry crash within ten years from now. — Arnie Hill.

Stani Kulechov: With DeFi, we are automating services that are operated by human agents in the traditional finance industry. “Once you have something automated, the technology risk is real”. The main risk I see is the tension between design and reality: the decentralisation by design paired with a centralisation by usage, just like we’re seeing with Bitcoin (decentralisation of the protocol VS extreme centralisation of the mining).

Blockchains bring the hope of enabling profound changes, overcoming the shortcomings of our legacy systems. The technology can activate change through the ecosystem. The tech itself does not change human nature, but it enables a renewal of the ecosystem that might drive this change.

What can of check and balances can we set up to make people feel more at ease using DeFi services and locking their assets in smart contracts?

Arniel Hill: “The software doesn’t change human errors, and people build software…”

To manage the risk and volatility in DeFi, we rely on:

Risk analysis services Trust in the open markets, to define the interest rates for lending or margins, for instance. The replacement of 3rd party middleman with software — that does come with its own kind of risk.

Efficient markets can only exist when there is a perfect symmetry of information, which means that everybody both has access to all the required information, but also a proper understanding of it. In that sense, the transparency of DeFi services are democratising access to this information; however, we still have much to go regarding the understanding of it.

Finally, until the DeFi systems are mature enough, some degrees of centralisation is be needed. Having some form of central override that can be used in case of critical failure is useful: let’s not forget about The DAO hack that leads to the Ethereum Classic fork.

Thanks to Ethereum, the information is transparent and available. In DeFi ecosystems, such as MakerDAO, users can get involved and vote on things such as interests rates. How do we get the users involved and make sure they are working in the best interest of the ecosystem?

Let’s take a step back. How do people feel about financial products overall? They simply hate them! — Lex Sokolin

Lex Sokolin: Let’s take a step back. How do people feel about financial products overall? They simply hate them! They hate them so much that the only marketing strategy that works for banks is the “we’re not a bank” angle. When it comes to financial products, people tend to get stressed out and anxious. You can clearly see that with fintech startups: they have massive customer acquisition costs, it’s one of their biggest hurdles. So, generally speaking, people have a negative interest in finance.

Now, let’s go back to voting. How do people feel about that? Well, once again we have a kind of a paradox: “they want to vote, and once they can, they don’t”.

At this point, I pointed out to Lex that comparing DeFi votes with political voting, such as elections, might unfair — in elections, people vote for representatives. With DeFi services, people are voting on specific items such as an interest rate for their system.

It all comes down to game theory: people will get involved in your vote only if they feel like their vote will make a difference, be it statistical or perceived. Think about organ donation systems, for instance — most of the people won’t take action about this, despite the criticality of it. Therefore, the default in these systems is decisive. Countries that switched to a default opt-in for organ donations so a significant increase in the participation.

Overview of the loan originated per month with DeFi services, courtesy of LoanScan.io

Since there is voting, how do we protect the systems against abuses?

Alex Ryvkin: DeFi is nothing new. If we take a broader historical perspective, centralised financial services are the novelty, as they only emerged recently over the last couple hundred of years. The default parameters in voting are what matter: maintaining healthy and engaged participation is the best way to hedge against attacks.

DeFi is nothing new. If we take a broader historical perspective, centralised financial services are the novelty, as they only emerged recently over the last couple hundred of years. — Alex Ryvkin

Arniel Hill: The current UX of DeFi services is what hinder their growth and participation in their governance mechanisms. Retail investors are not educated enough to deal with them right now. If they get liquidated all the time, they will not want to partake.

However, there is also an opportunity as most people are fed up with current financial gatekeepers, such as credit checks services or banks. The true uniqueness of DeFi is the ability to provide instant and non-discriminatory liquidity. DeFi services don’t need to data-mine their users to estimate their risk.

(Audience Question): Lending and borrowing became harder after the 2008 crisis, but also somehow fairer since there are now fewer defaults. Aren’t we going back to the pre-crisis craze with DeFi services?

Arniel Hill: What about the unbanked and other people without access to traditional financial services? If you’re taking out a loan on current Maker or others, you have to have a 150%+ collateralised position: the risk is mostly on the borrower’s side, since the lender can claim the collateral if the borrower defaults.

It’s a matter of knowledge: how do we teach people about this risk? Consider payday loans company and loan sharks: do you think that their users understand the interests and underlying mechanism?

Stani Kulechov: There are different levels of DeFi services and as many risk models. Right now, it’s mostly about over-collateralization, but it does not work for everything. We have yet to see the tokenisation of debts and the under markets to trade them.

In the current systems, when someone asks for a loan, banks are making a decision based on hundreds of factors — and they also have much more possibilities for debt collection. To move away from the over-collateralization, we need enforcement.

(Audience Question): Aren’t these contracts exploitable by criminals? Can DeFi services be used for money laundering?

Lex Sokolin: This is a widespread concern; yet, it’s not statistically accurate. Money laundering made using blockchains is tracked very closely and currently marginal.

Alex Ryvkin: If you want to launder money, blockchains are not your best option. All the transactions on blockchains are public, and some services monitor them for suspicious activities, such as Chain Analysis.

However, this suspicion is real and has consequences. Because of it, cryptocurrencies services have stricter AML/KYC (Anti Money Laundering & Know Your Customer) policies that most legacy financial companies. Money laundering happens with traditional services too.

We have to do everything we can to mitigate/eliminate the risk because if we fail, the whole industry is at risk. — Stani Kulechov

Stani Kulechov: With DeFi services, everything is automated and going back and forth — so the real question is: how do we know what’s happening? Most of the players of the cryptosphere are taking drastic measures to mitigate risks of abuse. Considering the scrutiny the crypto industry is under, “we have to do everything we can to mitigate/eliminate the risk because if we fail, the whole industry is at risk.”

Let’s wrap this up: what’s the most exciting thing you can envision emerging out of decentralised ledger technologies (DLTs) in the next 20 years?

Lex Sokolin: People will have convenient access to global asset allocation: that is diversified, reallocated dynamically, adapted to their needs and situation and without requiring huge capital or charging excessive managing fees. Such services exist today, but they are not accessible to most. The gist of DeFi is essentially to grant access to “luxury financial services” to anyone.

Alex Ryvkin: DLTs will enable more efficient exchanges of information and value, and remove the need and the want for gatekeepers. DeFi will bring more fairness and transparency to our financial systems.

Stani Kulechov: By then, we’ll have something like an internet of smart contract powering most applications people used. Linking smart contracts with one another will enable more and more use cases. Finally, we’ll see centralised financial services being increasingly connected to the decentralised ones, which will significantly increase the liquidity of Defi services. We might not need twenty years for that; five will probably be enough!

Arniel Hill: Along with the democratisation of “luxury” financial services described by Lex Sokolin, we’ll see everything being tokenised, including the human and social exchanges. As DLTs develop, trust and relationships will play an increasingly important role.