Over the last few days, a debate has been brewing on Crypto Twitter (CT) between supporters of Vitalik and The Ethereum Foundation (EF) and supporters of DeFi products and founders. The former suggesting that Vitalik and EF harbor anti-DeFi sentiments and are actively holding back the growth of the sector. One outspoken critic is Kain—founder of Synthetix and a pioneer in yield farming—who has expressed concern with a lack of initiative and discouragement from Vitalik. People are either accusing Vitalik of being a DeFi bear or blindly agreeing with his every word.
As with most things on CT, the real facts are probably somewhere in the middle and both parties can have the best interest of DeFi in mind even though they don't agree.
Let's break it down.
Vitalik has been generally bullish on the DeFi space, especially in the early days when new contract designs were being introduced that allowed liquidity to be supported onchain. You can check out some of his videos discussions here. Despite showing support for many of the advances and experiments over the years, he's taken some flak in the recent weeks for his stance on way that DeFi has been growing (or not growing).
His most recent take is that DeFi has been stagnant and has fallen victim to the same type of get rich quick mentality that has plagued much of crypto this cycle. He has actively advocated for building simple yet robust DeFi products rather than products who's only selling point are crazy APYs and rely on extractive or dilutive mechanics like emissions to achieve these high purported returns.
His suggestion is that for DeFi to thrive, we need to switch our focus to utility-based products like stablecoins, fractionalized RWAs, and commodities exchanges. He believes that things like fractional ownership can help retail investors enter the real estate market without being overly leveraged in one asset type, making DeFi globally accessible to everyone.
In August, Kain wrote a tweet hinting that EF and Vitalik were not being supportive of DeFi. He elaborated on his stance on the "Steady Lads" podcast (link here), where he stated that while he respects Vitalik, he disagrees with his stance on DeFi.
Kain mentioned that Vitalik and his "inner cabal" at EF have openly discouraged founders from building DeFi products during meetings, and that established and important protocols like Aave are not part of this "cabal" and therefore don't receive the type of support that Maker and Uniswap receive.
Despite this, Kain and others in the discussion believes that Ethereum is still an ideal ecosystem compared to other chains and remains bullish on the network.
Personally I'm all for experimenting and trying new things in DeFi, but if the entire world is going to come onchain DeFi needs to have better infrastructure that can not only bring finance onchain but provide a better option than legacy systems.
Simply having a means to swap tokens (traditional LPs) and provide collateral for highly-liquid pairs (Aave, lending pools) is not enough. Likewise, putting yield farms that use token emissions and rely mostly on trading revenue and ponzinomics isn't a good look for the space either. As usual, the right path is somewhere in the middle.
It's impossible to say what concepts will eventually make an impact on the average user. We've already seen yield farming concepts bleed over into other spaces on Farcaster where apps like Alfafrens have social networks on top of yield-farming paradigms.
I understand completely the frustration from both Kain and Vitalik/EF. Simply dismissing the current state of DeFi or not providing backing for products that have propped up your network simply because they don't fit the average person's risk model is bad for business. Ignoring the fact that the current state of DeFi looks more like a casino or a carnival to outside observers is also foolish.
If we don't align DeFi with the needs of the broader financial ecosystem, someone else will, and I guarantee they won't care about decentralization and permissionless systems.
The discussion between CT and Vitalik has brought up several elephants in the room:
Who is really paying for insanely high yields?
This has been a longstanding concern in DeFi, as the APY numbers you see on yield platforms are generally a derivative with respect to a very specific set of circumstances (i.e. the current function remaining unchanged over a year) or padded with emissions in some native protocol token. Instead of creating novel sources of real yield, many tokens are only valuable as a yield-bearing instrument when they are actively traded, which has (as Vitalik put it) created an ouroboros effect downstreaming the ETH market.
The role of centralized entities in DeFi
For better or worse, centralized entities play a significant role in the current landscape. Whether it's oracles for price calculations or multi-sig wallets as contract owners, most successful protocols have a some centralized aspect while truly decentralized protocols have struggled to maintain the same level of market dominance. While fully decentralized and permissionless systems are ideal for many things, having a period of time where a centralized entity slowly cedes control to decentralized consensus can be beneficial.
Lack of innovation in DeFi
Groundbreaking innovation has been relatively stagnant in DeFi recently. With a lot of newcomers to the space who weren't here in previous cycles, why build something novel that takes time when you can recycle the same tricks from previous cycles on a new audience?
While that is not entirely true, many protocols are just outright forks or slight variations on existing concepts, making little difference in the overall growth of DeFi.
As a builder in the DeFi space, these are things I'm thinking about all the time. So to see discussion popping up on CT specific to DeFi after so many years of building quietly in the background is exciting, even if it's causing debate. I've been building onchain for a decade now, an while I don't completely agree with either side, I do think that DeFi is still one of the most important use-cases for crypto.
Being able to have your assets on a permissionless network, available any time, anywhere, is powerful. That's freedom.
But DeFi needs direction if we're going to make an impact on billions of people.
This is a huge part of the motivation behind what we're building at Xeon Protocol, which aims to address some of these big questions. We need more primitives that protocols can build on top of. Risk-management should be engrained in DeFi and utilized as needed for any app or asset.
As I said previously, it's impossible to predict what specific advancement is going to take hold, which is why Xeon takes a token-agnostic approach to our products. Whether it's a stablecoin, NFT, yield-bearing token, or RWA you should be able to unlock it's underlying liquidity and make it composable in the broader DeFi space. Hedging allows you to mitigate risk without immediately realizing gains or losses, and make ad-hoc deals with other users to spread out your exposure.
You shouldn't need permission to do this, they are your assets. As DeFi builders, we should prioritize giving people as much freedom to interact with the broader ecosystem as possible.
Having contracts that facilitate OTC transactions between users, allowing them to adjust terms based on their personal risk tolerance with little restriction is important for new asset classes coming onchain.
We're trying to minimize the role of centralized entities by having as much as possible done on the protocol level. While we've written a framework for P2P DeFi deals, users are fully empowered to set trade conditions. Our options are self-contained tokens themselves, containing all of the terms, tokens, collateral, and settlement data required for users to adjust as they please.
Protocol revenue is handled through a multi-chain staking pool and returned to stakers as ETH, with as little liquidity left unused as possible. Participants can choose what networks and assets they want exposure to.
Our price oracle is another place we've tried to eliminate centralized points of failure. This has posed some challenges, but we've settled on a mix of centralized and decentralized solutions to create what I feel is the most robust onchain price oracle out there.
For large and well-known pairs, our oracle queries ChainLink's onchain price feeds, providing a quick reference for well-known, highly liquid pairs. This is important for assets that have a substantial amount of liquidity in exchanges.
All other pair data can be found through their onchain LPs, where our oracle searches first to find the most liquid pool between any two tokens across v2 and all v3 fee-tiers, and then returns both price data and the value of one token in terms of any other token.
This will allow Xeon users to more accurately price tokens in OTC deals, and provide a robust oracle for any other protocol that needs onchain access to price data.
I'm extremely bullish on DeFi, especially in the Ethereum and L2 ecosystem. The promise of Ethereum as a decentralized and permissionless network for the world is as powerful a narrative as ever.
Regardless of the current sentiment, we need to innovate while still addressing current concerns in the space to make DeFi more accessible to everyone. The only way forward is to listen to constructive criticism from people with skin in the game, use that feedback to improve, and keep building!
No matter who enters the DeFi space, or what type of assets everyone is talking about, Xeon is going to be there with solutions for both retail and institutional investors to plug any type of token they want into DeFi.
We appreciate the support from the community and encourage users to try our products. We're in the final month of testnet, so your feedback on our app and codebase is very likely to make a difference in what we're building as we pave the road to mainnet deployment on Ethereum and beyond.
Cheers,
Jon
