DeFi still has some work to do before large-scale enterprises or everyday users can bring on the next wave of investment, according to panelists on the first day of the 2020 LA Blockchain Summit.
Regulations never designed to accommodate the rapidly growing DeFi universe are partly to blame, said panelists, as they keep many potential users away based on concerns over staying compliant with existing laws and accurately reporting taxes. Moreover, DeFi is just plain complex.
Blockchain and smart contract audit firm Quantstamp has worked with dozens of DeFi projects and large enterprises like IBM and Toyota to help flesh out their blockchain strategies. CEO Richard Ma noted that accounting for DeFi transactions—which for US-based users are each individually treated as taxable events—is one factor holding many corporations back from investing more in the growing industry.
DeFi stands for decentralized finance, a set of automated protocols on the blockchain that offer bank-like services including loans and interest on deposited assets by using decentralized networks like Ethereum to facilitate transactions. But that interplay of systems creates practical problems for corporations. Hundreds or thousands of trades can be required to make a DeFi position profitable for large organizations.
“In DeFi you interact with systems like Uniswap or Maker, and from an accounting standpoint that’s very tricky,” Ma said.
However, stablecoins, or crypto assets pegged to another asset (such as the US dollar), may offer an easier transition for curious organizations.
“In the last year we’ve audited 12 different stablecoins—those are easier for the bigger enterprises to understand or potentially transact in,” Ma said. “The larger DeFi space is probably too complicated for them to start embracing anytime soon.”
Paul Brody, Global Blockchain Leader at global accounting firm E,Y said that while regulations make dealing with cryptocurrencies more challenging, his firm had already helped many businesses get in on the action with certain tokens, though not necessarily DeFi.
“We have over 150 financial statement audit clients who are doing material amounts of business transactions on-chain with stablecoins, with Bitcoin, and with other cryptocurrencies,” Brody said. “Vendors of private blockchains often raise legal questions when selling their products, but there are perfectly legal ways to do business on public blockchains even with cryptocurrencies in much of the world.”
Brody explained that while most businesses were focused on bringing blockchain technology into their own operations first, many had already expressed interest in accessing liquidity offered by DeFi as a potential source of funding and new business opportunities.
Businesses won’t be the only ones to get DeFi over the hump. In a separate panel discussing when DeFi will be ready for mainstream adoption, the founder of DeFi management platform Zerion, Evgeny Yurtaev, talked about the importance of user experience for onboarding new DeFi entrants, and how Zerion faces similar challenges to investors in assessing new DeFi projects as they rapidly accumulate.
“We spend a lot of time on designing new features and how to present them to the user, so that people feel safe when making transactions,” Yurtaev said. “Recently we were challenged when the number of protocols started expanding so fast we couldn’t keep up, so we’re focusing on security and safety of our users. It’s part of our task as aggregators of DeFi to serve the user as a trusted place where they can find products that have been verified and checked.”
