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The eyes of the world are on the trial of FTX founder and former crypto poster-child Sam Bankman-Fried, who has morphed into a symbol of the worst excesses of the last crypto bubble. But the media circus that surrounds proceedings is more true-crime series than legitimate commentary on decentralized finance.
It is true that defi has been on a roller coaster over the past several years. The sector exploded onto the financial and technological scene in 2021 as groundbreaking new tools allowed people to put their money to work and earn yield in unprecedented ways through participation in networks such as MakerDAO and Aave.
Despite the seeming suddenness of its arrival, this breakthrough was a long time coming. For decades, if not centuries, traditional financial markets and instruments have sold investors short in two important ways.
The first relates to access: since traditional markets are overseen by centralized gatekeepers such as banks and mutual funds, they have historically excluded huge swathes of the world’s population, particularly outside the wealthy countries that host the bulk of big institutions. The second limitation was technological. In a digital age, markets have remained largely analog.
Defi introduced innovations that opened the door to financial products that simply weren’t possible before. This turned out to be both a blessing and a curse: the combination of novelty and popularity led to a proliferation of defi products—not all of which worked as advertised. Many projects promised investors far more than they could deliver. And as the FTX-Alameda saga demonstrates, some strayed into outright fraud.
The enormous increase in activity, meanwhile, severely strained the capacity of Ethereum, which with its smart contract functionality, made many of these early innovations possible. Couple all that with the macroeconomic-driven descent into a bear market in 2022, and it’s no surprise that defi has suffered a retrenchment. But I believe we’re now on the cusp of a new era of growth and possibility.
There will however be one crucial difference this time around: much of the next phase of growth is poised to take place on Solana—if we build the infrastructure that will allow defi projects to thrive.
Green shoots, new growth
I’m confident that, with the right tooling, Solana can and will nurture the next iteration of decentralized finance: defi 2.0. As one of the ecosystem’s earliest entrants, I am familiar with the many strengths that make it a prime choice for the next generation of defi protocols.
Solana is one of the fastest and greenest layer 1 blockchains in the industry. It processes some 5,000 transactions per second in practice, but has hit top speeds of 65,000 in testing. This dwarfs Ethereum’s current speed of 15-25 TPS. This, along with the fact that Solana’s transaction costs are among the lowest in web3, has made it the chosen home of some of web3’s smartest and most innovative developers. In December, Vitalik Buterin noted in a tweet:
Positive sentiment about the network has grown throughout 2023, with strong performance reports and votes of confidence from a variety of quarters. September alone brought three significant votes of confidence.
On Sept. 1, MakerDAO, creator of popular stablecoin DAI, said it planned to use Solana’s codebase—not Ethereum’s—as the foundation for its new chain. MakerDAO CEO Rune Christensen said his decision was based on Solana’s efficiency, technical quality and available developer talent—and crucially, its resilience. A few days later, Visa offered validation from the mainstream world, when it said it would use USDC and Solana to supercharge its ability to settle in crypto.
And in mid-September, former Goldman Sachs executive Raoul Paul called Solana “the best major story in the defi space outside Ethereum,” praising its speed as well as its highly engaged developer community.
But while endorsements like these show that the wider world is recognizing Solana’s positives—speed, energy-efficiency, and proven stability—it still needs one ingredient to truly drive the emergence of defi 2.0: a critical mass of high-quality tokens.
Token flow is the lifeblood of defi. High-profile crypto assets would attract a new investor base, who would in turn create more liquidity. Greater liquidity would make Solana’s decentralized marketplaces more efficient and less subject to volatility, which could in turn attract more investors. This potentially self-reinforcing cycle of increasing activity and total value locked would lead to a growing, thriving defi ecosystem within Solana.
So what is the key to attracting more top-flight assets? Tools and infrastructure that make tokenization simple for project teams: from inception through to liquidity incentivization.
Support for liquidity provision is essential. Providers are increasingly demanding the kind of return on capital offered by exchanges such as Uniswap v3, which offers users the ability to concentrate the liquidity they provide on custom-set price ranges to maximize returns. Liquidity pools that couple v3-style concentrated liquidity with automation are also in growing demand.
Another way to stimulate greater engagement throughout the ecosystem is to introduce staking mechanisms that don’t force users to make the impossible choice between returns and voting power.
Building strong communities
Introducing tools like these to Solana would attract a more diverse set of users and would make it easier for projects to build healthy and engaged communities. Among other things, Solana needs infrastructure that supports a new kind of staking—one that provides governance and enables protocol reward sharing, while also allowing community members to retain a voice in how a decentralized organization distributes its assets.
With the right tools and infrastructure and a resulting influx of new users encouraged by mainstream support, Solana can indeed be the soil in which defi 2.0 will flourish.