Staking restores DeFi decentralization

Staking restores DeFi decentralization

The Evolution of Decentralized Finance (DeFi) in the Blockchain Industry

Decentralized finance (DeFi) was envisioned as a financial alternative, driven by the shortcomings of opaque businesses that often prioritize their own interests over those of their customers. The goal was to create a decentralized, self-governed economy that was transparent and independent from external influences. However, the current state of DeFi reveals that it is not as decentralized as initially intended. Instead, it can be better described as “blockchain finance.”

The Challenge of Stablecoins

One of the key issues facing DeFi is the dominance of centralized stablecoins in the crypto markets. These stablecoins, which are tied to traditional fiat currencies like the US dollar, are built for mass adoption and have gained a significant market share in on-chain volumes. In contrast, decentralized stablecoins have struggled to compete due to scalability issues and flawed designs.

Terra’s collapse exemplifies the challenges faced by decentralized stablecoins, and as a result, the emphasis in the DeFi space has shifted towards security at the expense of innovation. This has hindered the development of competitive decentralized stablecoins that could truly decentralize DeFi. While stablecoin adoption is positive for the industry, it is important for DeFi to offer an independent, decentralized stablecoin.

The Rise of Yields

Another factor affecting the decentralization of DeFi is the shift of real risk-free rates to 5%, driven by the rise of US bond yields. This has created a competitive landscape for crypto collateral assets that earn limited passive income. Struggling crypto protocols and even well-established DeFi blue chips have turned to real-world assets (RWAs) in search of higher yields.

The rapid adoption of tokenized treasuries and RWAs raises questions about the industry’s commitment to decentralization. While it may modernize finance and attract more users to the crypto ecosystem, DeFi’s heavy reliance on US Treasuries and centralized stablecoins presents a challenge for achieving true decentralization. To provide viable alternatives for holding money outside the traditional banking system, solutions are needed to serve as decentralizing forces in DeFi.

The Role of Crypto Staking Yields

Crypto staking yields, particularly those offered after the Shapella upgrade to the Ethereum network, can help bring DeFi back to its decentralized roots. With the upgrade, users can stake and unstake their ether (ETH) at will, significantly reducing the liquidity risks associated with staked ETH. As a result, stETH (staked ether) has become a primary collateral asset in DeFi, overtaking ETH itself.

Staked ETH now offers yield-bearing potential, rivaling bond yields at 4%-5%, while providing protocols with an alternative to centralized stablecoins. This enables DeFi protocols and stablecoins to build on top of stETH, evolving independently of the traditional banking system, and reducing censorship risks. Furthermore, with the potential for staked ETH yields to outpace bond yields in the future, DeFi could become truly self-sufficient, relying on crypto-native, yield-bearing collateral.

In summary, the DeFi industry is currently grappling with the challenges of centralized stablecoins and the adoption of real-world assets. However, the rise of crypto staking yields, specifically with the de-risking of stETH, presents an opportunity to reestablish decentralization in DeFi. By embracing this shift, DeFi can move towards its original goal of providing a decentralized, transparent, and independent financial ecosystem powered by blockchain technology.