Few topics fascinate as much as decentralized finance (DeFi). Since the first projects appeared in 2017, the debate has been ongoing.

For its proponents, it's a playground for innovation and creating a more inclusive financial system. 🙌

For its detractors, it is more a symptom of an ultra-financial, speculation-driven ecosystem. 🤑

What is the reality? As is the case almost every time, things are a bit more nuanced.

To understand what DeFi brings, we must first understand what we are talking about.

DeFi is an alternative financial infrastructure that relies on the characteristics of blockchain protocols, namely decentralization and transparency.

In its "purest" form, it allows financial services to be provided without going through a central authority, usually a bank. With DeFi, it is possible to obtain a loan, to invest your savings, without going through Deutsche Bank or BNP Paribas. 🏦

The most well-known DeFi applications are Maker (decentralized stablecoin), Aave (loans without intermediaries) or Uniswap (digital asset exchange without intermediaries). But how many people actually use them?

"DeFi is still in its infancy. Whether it's the number of apps or the number of users, the numbers are very low," says Stanislas Barthélémi, crypto expert for KPMG. Only 400,000 to 600,000 people use it on average each month (chart below). "It's clearly a niche within the crypto ecosystem," he continues.

Monthly unique users of DeFi protocols. Source: Dune Analytics

Currently, DeFi is mainly used by traders to borrow more cash without going through centralized exchange platforms (Binance, Coinbase, etc.). 📈

Seen from this angle, we are far from a system that would correct the shortcomings of traditional finance, particularly in terms of accessibility and impact on the real economy.

It's a fact: no one borrows stablecoins by placing cryptos as collateral in Aave to finance a real estate purchase or an entrepreneurial project. Why not? Mainly because you have to place as much (or more) capital as collateral as the amount borrowed.

"We certainly need to mourn this type of DeFi use, at least in the short term," blows one expert. "To offer a truly inclusive borrowing system, it would be necessary to develop sub-collateralized loans that would be repaid via small monthly payments, but actors would have to bear the risk of the borrower's default," he continues.

This implies that traditional credit specialists would have to be involved in this infrastructure (insurers in particular), which is not very compatible with the Web3 philosophy. And even if the players in the sector wanted it, the expertise is still far from being there...

"We are still at the very beginning of decentralized finance, so it's not surprising to encounter these kinds of obstacles," says Stanislas Barthélémi. "However, we must not lose sight of the fact that DeFi offers financial tools that Mr. Everyman would never have had access to in the traditional world," he adds. 👍

The example of Uniswap is interesting in this respect: the application makes it possible to list any token on the platform so that it can be exchanged for other securities without intermediaries. In the traditional world, "listing" on the stock exchange can be much more complicated. Above all, being listed on a financial market does not allow to be listed everywhere.

Uniswap (and more generally DEX aggregators such as Paraswap) is a very important milestone in the emerging ecosystem.

Other major projects include Lido, which tokenizes the deposits that secure Ethereum ($9 billion of immobilized value) and Curve ($5 billion) positioned on the exchange of assets of the same value.

The biggest DeFi projects classified by fixed value (TVL). Source : DeFiLlama

Among the less mature applications, but with interesting potential, we can mention GMX ($600 million) or dYdX ($370 million), decentralized exchange platforms with an order book (designed on Arbitrum for GMX, Starkware and soon Cosmos for dYdX).

All these projects allow financial transactions to be carried out without entrusting the funds to third parties (non-custodial). "Where DeFi is already a great success is in the fact of doing without intermediaries," says Stanislas Barthélémi.

Now it must become more efficient to justify its status as an alternative infrastructure.

From the "crypto-casino" to the real economy

And the task ahead is quite considerable. "There are still a lot of flaws in DeFi in terms of risk, efficiency and accessibility, especially for institutional players," argues Paul Frambot, co-founder of Morpho, a protocol that optimizes deposit and borrow rates on Aave and Compound. "If we're honest, DeFi is still a kind of crypto-casino without rules," he points out.

For the French entrepreneur, however, DeFi is full of promise and perhaps connected to the real economy. "That's what we're working on," he explains.

Paul Frambot mentions in particular the possibility of "connecting" to the repo market (Sale and Repurchase Agreements), i.e. refinancing, to which only a few institutional financial players have access today.

The repo rate is the rate at which central banks lend to commercial banks. One reason why end savers cannot get the same terms is because of the number of financial intermediaries who each take the equivalent of a small commission. 💰

"By removing these intermediaries, we could greatly optimize the efficiency of the system for the benefit of individuals who are at the end of the chain," Paul Frambot wants to believe. "Traditional finance works poorly for operational reasons, DeFi is an answer that can improve the existing infrastructure".

A relevant use case: corporate finance

Interweaving DeFi with traditional finance seems to be one of the ways forward for most experts, mainly through the use of decentralized stablecoins, such as DAI dollar (issued by Maker) or agEUR (issued by Angle).

Currently, any organization can issue a stablecoin if it holds sufficient currency (euros, dollars, etc.) to guarantee the stability of its token. An example is Circle with its USDC stablecoin backed by dollars.

But this could go beyond currencies: the same logic could apply to securities (stocks, bonds, ETFs, etc.) with interesting consequences for companies and their financing.

"Today it is very difficult for many companies to use certain securities (such as commercial papers) as collateral against cash," says Pablo Veyrat, co-founder of the Angle protocol.

"It would be quite feasible to place these securities in Angle in exchange for the issuance of stablecoins euros. Using its long-term assets to finance its short-term activity, this is a very concrete use case for DeFi," the entrepreneur assures. 🤝

According to him, the tokenization of financial securities is not yet widespread due to the difficulty of implementing such solutions and also their cost. For example, you have to pay blockchain oracles to track the prices of tokenized assets. "On top of that, you have to have liquidators who can pay back the debt and recover the tokenized products if their value drops," he continues.

In short, there is a whole specialized ecosystem missing that doesn't yet exist... But things are moving, and Ondo Finance is one of the players making things happen. The American company issues tokens backed by ETFs representing US Treasury bonds managed by asset management giant BlackRock.

Backed Finance of Switzerland, meanwhile, provides access to tokenized index funds also held by BlackRock. By acquiring Backed Finance's bCSPX tokens, investors can gain exposure to the iShares Core S&P 500 UCITS, the ETF that tracks the performance of the 500 largest U.S. companies listed on Wall Street's flagship index.

The future of traditional finance?

For Adam Levi, co-founder of Backed Finance, DeFi makes it easier to access investments 24 hours a day (whereas the traditional market is open only a few hours on business days) and whose settlements are executed with complete transparency in less than five minutes. ⏱

The fees are also much lower than those charged by brokers who take their commission.

Adam Levi is not the only one to think so. BlackRock boss Larry Fink said in early December that the next revolution for the markets will be driven by the tokenization of financial securities, also touting "instant settlement" and "reduced fees."

"It's pretty amazing what Backed has managed to do," emphasizes Pablo Veyrat, "I hope the project holds up legally because there are still a lot of regulatory uncertainties..." 😓

Backed ensures compliance with the Swiss "DLT" law of 2021. This law now recognizes digital assets in the same way as traditional financial assets, allowing them to be tokenized. This law is one of the first in the world to clarify this aspect. Is this enough for the development of products like Backed?

"This product is legal in Switzerland... but only there for now," moderates William O'Rorke, partner in the French law firm ORWL, which specializes in disruptive technology law. "For this token to be distributed in other markets, other national regulators must authorize it, not to mention the risk of reclassification as we have seen in the United States," he fears.

According to our information, several applications have been filed by Backed in Europe. One of the most eagerly awaited applications for the DeFi ecosystem will be answered in a few weeks...