Decentralized finance (DeFi) protocols could soon emerge as the world’s dominant liquidity pool if scaled effectively, according to Alex Batlin, the founder and CEO of cryptocurrency custody platform Trustology.
CryptoNewspeople spoke to Batlin — also a co-founder and board member of the Enterprise Ethereum Alliance — at the recent BlockDown 2020 conference to discuss the outlook for decentralized finance and how DeFi is impacting crypto custody.
DeFi to become predominant means of finance globally
Alex emphasizes that he is “super excited about DeFi,” stating: “My macro-hypothesis for DeFi is that as and when it starts working, it potentially could be one of the most trusted liquidity pools because it is decentralized, therefore much more global.”
The Trustology founder contrasts DeFi protocols to centralized exchanges, arguing that most exchanges predominantly operate regionally due to regulatory considerations and customer preference. “While if you look at the IP address distribution for people who use DeFi, it is much more global,” he states, adding:
“As protocols mature and speed up, etc., one would expect that the liquidity would be much deeper, and [at] cheaper pricing. So if the hypothesis plays out, I think this would be the predominant mechanism by which we do finance.”
Custody platforms must adapt to DeFi
Batlin emphasized that decentralized finance also poses several challenges for custody providers.
“Typical custodians custody assets, therefore, are pretty fixed in what they can do — ‘I will custody Bitcoin, I know how to do bitcoin,’ or ‘I will custody Ether, so I know how to do Ether,’” Alex stated, adding:
“The problem with DeFi DApps is that it’s almost an infinite number of different permutations of what can be done with an asset or a smart contract. The way we look at it is — ultimately you’re not really in custody of blockchain assets, you’re in custody of keys and transaction management.”
“This is why we’ve done the integration with MetaMask,” he adds, “we’ll be providing our APIs so that essentially we can re-sign any transaction.”
Noting the increasing complexity of the crypto custody, Batlin laughed, stating: “There’s a lot to do. When you start, you think, ‘oh, it’s just a wallet,’ and then you realize it’s a little bit more than that.”
Scalability could pose a challenge for DeFi’s growth
Despite his excitement for decentralized finance, Batlin notes that the platforms supporting DeFi need greater scalability in order to facilitate the mainstream adoption of decentralized finance protocols:
“For DeFi to really work we need to get from 20 transactions per minute, to 1,000 to maybe a couple of thousand per minute, and then we start to get really serious.”
Batlin states that “ETH 2.0 is getting there,” adding, “If you look at the specs, it’s pretty exciting, and there are a number of layer two services coming on board as well.”
The Trustology CEO notes that “there are also less general-purpose, more dedicated blockchains […] that are already starting to severely increase performance.”
“Of course, you trade off the generality of Ethereum for slightly more limited chains. Nonetheless, if you just want to issue tokens and trade them, you now have platforms that are significantly faster.”