DeFi Still Needs a Silk Road Moment

DeFi Still Needs a Silk Road Moment

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Mainstream criminal adoption would prove that decentralized finance (DeFi) is building tools with real utility, because if there’s any one group that is both underserved in its access to sophisticated financial products and willing to pay huge premiums to acquire them, it’s criminals. 

The Silk Road was launched in and quickly became the first example of Bitcoin’s product-market fit. While some proponents of cryptocurrencies argue that today criminal activities are a , censorship resistance is one of the key features of all decentralized technologies and criminals have played a part in crypto’s wider adoption. 

Bitcoin’s ability to make payments “the man” doesn’t want you to make is what makes the cumbersome tech worth it. This can include criminal activity such as ransomware and darknet markets (DNMs), but also funding (a rogue academic publisher) and opposition leaders in oppressive regimes.

Adoption by criminal enterprises is evidence of the product/market fit of censorship-resistant technologies and an indicator of whether innovation will see usage in the non-criminal world. It would have not been possible to create the Silk Road without a truly effective censorship resistant payments method. The fact that Silk Road and other criminal enterprises are able to use bitcoin effectively is evidence cryptocurrencies are a useful and censorship resistant tool. As of now criminal activity online is on , although other cryptocurrencies, such as , also play a part.

The 2017 initial coin offering bubble and “ have shown that Ethereum is useful for a different sort of criminal activity: unregistered security sales and other elaborate Ponzi schemes. In a way, this is evidence of its effectiveness as a permissionless smart contract platform. But just because Ethereum has proven itself to be useful for Ponzi schemes and scams does not mean it is useful for more than that. Criminal adoption is a necessary, but not a sufficient, condition for the success of censorship-resistant technologies.

The latest hot new trend on Ethereum is decentralized finance (DeFi). According to Associate Professor , DeFi is the ability to create and use “financial services using smart contracts, which are automated enforceable agreements that don’t need intermediaries like a bank or lawyer and use online blockchain technology instead.” 

These contracts are programmable and can be built into decentralized applications (dapps). We now have , decentralized autonomous organizations () that play an important role in funding allocation, protocols such as and for building synthetic assets that mimic the price action of off-chain assets, decentralized price oracles such as to bring off-chain data onto smart contracts, and all sorts of other infrastructure that were not available in 2017.

Some would argue this is not new infrastructure, but these are just fools. Is there real utility to this new financial infrastructure? Or are most of the problems DeFi is solving problems the same problems DeFi caused in the first place, as believes? 

There are a few hints that financial infrastructure of criminals is being built. One of the largest DNMs, Hydra, considered doing an ICO but eventually desisted. Given the extensive history of DNM exit scams, it is highly risky that a DNM would be tempted to take the funds they raised and run. The largest and most trusted DNM, Empire Market, recently , reportedly taking $30 million in BTC of user’s funds. Given that , why not set up a market that can be owned and managed by both the users and the vendors in a trust-minimized way? Think Uniswap meets the Silk Road.

Another product DNM vendors would gladly purchase are insurance products that protect against market exit scams and other sources of systemic risk, such as continued DDOS attacks against DNM sites. Current DeFi analogs include .

Disputes over insurance claims and even over drug shipments could also be handled in a decentralized way. Dispute resolution is one of the most resource-consuming problems of DNMs, and dispute resolving admins are proven to be security holes as a trusted third party. Why not outsource dispute resolution to a decentralized platform such as ?

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