Permissioned DeFi: Paradox or possibility?

From Bartering to Blockchain

Ever since barter transactions to the first minted coins, trust has been the foundation of our commercial system.

Over the millennium, we’ve designed centralized structures to regulate economic, social relationships and ensure trust in the financial system.

In 2009, the bitcoin whitepaper proposed a completely opposite model: a trustless and permissionless blockchain. It took more than 10 years for the financial industry to deal with the implications of Nakamoto’s whitepaper, and this process is still ongoing.

However, nowadays, it’s becoming clear that the blockchain could be used for a large number of applications, including those in the financial and industrial sectors. Companies started to look for solutions for these applications. Excluding bitcoin, which is still the most decentralized blockchain, the result is always with a half-in solution: centralized exchanges, blockchains with a closed environment, blockchains that can only be accessed by a pre-selected group.

Blockchain with Gatekeepers?

But why invest time and money to create blockchains that have gatekeepers? Why build control into a technology that was created to be entirely decentralized and public? We’ve seen the same story in the past already.

While blockchain technology is relatively new, the debate on ‘public’ technologies is not. In the ‘90s, we had the internet vs intranets debate. And, more recently, we’ve been debating the merits of on-premise software (installed locally) as opposed to the cloud (hosted on vendor’s servers).

In these past cases, the ‘public’ model of the technology — that is, the internet and the cloud — in the end, came out as the preferred choice. But have intranets and on-premises technologies gone out of the way?

Of course, they haven’t.

The reason? While public technologies may emerge as a dominating force, the need for closed technologies like intranets, on-premises servers, and, indeed, permissioned blockchains remains. At the end, the market decides what’s to be adopted and every single entity decides what’s best for their specific application.

The same movie is happening nowadays with Blockchain. Bitcoin is the origin of this technology and remains the only truly decentralized network. All the other blockchain technologies are more controlled or centralized. In this article, more than Blockchain in general, we want to focus on Defi, a topic that we regard as crucial, here at Blockinvest.

Defi has been welcomed as the future of finance for good reasons. It offers an open and global financial system tailored specifically for the digital age, providing an efficient alternative to the traditional, difficult-to-access financial systems prevailing worldwide.

It can enable better control and visibility over your finances alongside empowering every participant with insights required for better financial decisions.

So, where does the topic of permission Defi come in? Is it different from the decentralized finance we know today?

Even if Defi works quite well with purely digital assets such as cryptocurrency, with the current structure, it’s limited to this field. It cannot be applied to real-world assets, which are in great need for innovation like real estate, equity, bonds. Mainly because with such assets, more control is needed than with cryptocurrencies.

Decentralization Vs Simplification

The key here is the balance between decentralization and simplification. Using an entirely decentralized structure leads in fact to some User experience complexity and also, regulation struggle. How can you be widely adopted if only a restricted group of skilled users can use your technology? Also, how can you hope to reach institutional or company adoption, if your premises clash with regulations of the entire world?

If we look at the blockchain market, the largest companies are quite centralized. Major players like Open Sea, Binance, or Crypto.com. They have millions of users, they make it easy for everyone to access the decentralized world and in order to do so they act as gatekeepers. They’re not centralized only because they ask you for KYC, but because anything it passes through them, they are the gatekeepers.

So this is definitely a demand coming from the market: users want and need these types of platforms; they prefer to sacrifice some extent of decentralization, trusting a third party to mitigate risks they would otherwise have to take themselves.

The same would be true when talking about DeFi for real-world assets. We analyzed the benefits of such a transition in the previous articles, however here we want to take a pragmatic approach and look at how it would be possible, creating a solution that would be a compromise between decentralization, user experience, and regulation. Reaching potentially a wide adoption.

The main point to understand here is: Is DeFi going to move towards regulation or institutions are going to move to a more decentralized world?

The real challenge is to find a middle ground. If we want to trade real assets (real estate, equity etc) with DeFi, gatekeepers might be necessary. Real-World assets are inherently subject to regulations and naturally need some control.

Is it worth sacrificing a bit of decentralization to embrace an innovation that would greatly benefit the financial market? That would make a closed environment accessible to everyone worldwide?

Or should we just keep building entirely open platforms that can be adopted only by small niches but could not be used by any institution?

Of course, doing DeFi for real assets with maximum flexibility, decentralization and transparency could make a lot of the early crypto adopters and bitcoiners happy. However, if this clashes with the regulations of most countries in the world, we would lose the opportunity to bring real-world assets on the Blockchain and available to everyone through Defi.

So, again the question we want to ask would be: is it worth it to create an entirely decentralized platform, while risking not having such a powerful innovation in place also for real-world assets?

We expect the same story that happened with the internet to play out. A world where DeFi will keep being used for purely digital assets like cryptocurrencies. While for physical, real world assets, there will be a necessary shift towards regulations; and institutions increasingly listen to market demands of democracy, inclusion, decentralization.