Forex and DeFi: A Match Made in Heaven?

By Alex Wilke

Despite the term having been in common parlance for almost five years, no one can quite agree on what DeFi is. That it’s something to do with delivering financial services through decentralized networks is indisputable. Beyond that, however, much of what DeFi is and does remains a matter of debate.

Whether you believe DeFi is a technology for banking the unbanked or bankrupting unrestrained risk-takers is a matter of perspective. Like any tech, DeFi can be used as a force for good, bad, and everything in between. It’s become clear, however, that whatever decentralized finance started out as, it’s since evolved almost beyond recognition. Understanding the shape it may shift into next calls for reprising how it all began.

In the Beginning There Was DeFi

Like all great origins stories, many entities can lay claim to having spawned the DeFi movement. This much can be said for certain: In late 2018, a decentralized exchange called Uniswap launched with little fanfare. It wasn’t the first DEX – EtherDelta and Bancor were already on the scene – but it was the first to incorporate a simple UI. Over the ensuing months, Uniswap volumes began to pick up as liquidity pools and onchain trading gained traction.

Sometime in 2019, the portmanteau “DeFi” began being bandied about to describe the fledgling industry that had sprung up around decentralized platforms such as Uniswap and Gnosis. By 2020, the entire crypto industry had kicked into high gear, with DeFi being credited for leading the renaissance. Yield farming; rugpulls; degens; pool two; the original summer of DeFi spawned as many neologisms as it did dubious altcoins.

It was all highly entertaining and, for those who knew what they were doing, highly lucrative. In late 2021, however, the tide began going out and the TVL in DeFi protocols, which had surpassed $200 billion, receded with it. Today it stands at barely a quarter of that figure.

DeFi’s Great Drift

The decline of DeFi is less a story of tumbling asset prices – that’s been a global problem for the past 15 months – and more a story about stagnation. When the crypto market began to drop, DeFi assets got hammered the hardest. Arguably, this was partly due to a failure to innovate.

All of the great innovations that had powered DeFi’s breakthrough year of 2020 had been replaced by ponzinomics and arcane signaling as influencers appended “(3,3)” to their social bios. A far cry from fostering greater financial inclusion, which DeFi was originally credited as facilitating. So where does DeFi go from here?

Decentralized finance has already entered its next phase of life, even if the fruits of this metamorphosis have yet to manifest. Over the past 18 months, DeFi developers have been making overtures to institutions stationed on the other side of the fence. These gatekeepers of traditional finance have in turn been gazing back. A union once considered unholy by DeFi purists is increasingly looking like the inevitable shape of things to come.

Frenemies or Brothers in Finance?

On the surface, TradFi and DeFi have little in common. One chases regulatory approval and fiercely protects its IP behind closed systems; the other builds fast, breaks stuff, favors open source code, and only accedes to regulators as an afterthought.

Yet on closer inspection, traditional and decentralized finance are not so far removed. Both industries are intent on creating new opportunities for yield generation, payments, savings, and loans. They harness technology to achieve these aims and are endeavoring to bring these services to a global audience. They might take different ascents, but they’re shooting for the same summit.

If TradFi and DeFi were in a relationship, the public label would be “it’s complicated.” It’s taken time for institutions to appreciate the benefits of blockchain and why financial transparency is generally a good thing. DeFi evangelists, in turn, have belatedly accepted that onchain does not mean exempt from the law, and that it’s still possible to enjoy the benefits of open finance within a compliant framework.

DeFi’s Trad Wife Is a Keeper

Just as DeFi comes in many flavors, the same is true of TradFi. Savings and checking accounts, loans, mortgages, credit cards, and investment products are universally accepted services. And then there’s forex, the Marmite of TradFi: you either love it or hate it, get it or get bamboozled by it. It lacks the luster of wealth management and private equity, and yet is more egalitarian than any other TradFi product.

From solo traders to pro investment firms and from New York to Lagos, forex attracts a diverse and globally distributed demographic. Anyone can participate in it, and while the learning curve is steep, getting started is relatively straightforward. Does that remind you of any other financial industry?

That’s right, we’re back to DeFi. If it is to be married with any TradFi vertical, forex is surely the best fit. The foreign exchange market is the world’s largest decentralized market, enabling anyone, anywhere to trade global currencies. With $6.6 trillion in daily volume, forex makes DeFi’s benchmarks read like rookie numbers.

Placing a generous slice of the forex markets onchain wouldn’t just mainstream DeFi – it would also work wonders for forex’s public perception. Lack of global coordination, volatile conversion rates, unpredictable fees, and trust dependency, have impeded forex from hitting the heights it’s capable of. The market needs drastically revamped to improve speed, lower costs, and drive greater efficiency. All of which should be music to the ears of DeFi developers.

A recent research paper by Uniswap and Circle Labs, “On-Chain Foreign Exchange and Cross-Border Payments,” highlights several advantages to DeFi-based forex. It cites the elimination of settlement risk; reduced FX rate manipulation risk; and deeper liquidity and market depth, reducing the risk of flash crashes.

If decentralized finance can transform any global industry, it’s not gaming, insurance, or payments. It’s surely got to be a multi-trillion dollar industry whose pain points can be eased by a judicious application of web3.

They might not know it yet, but DeFi and forex were made for one another.

About the author

Alex Wilke is the co-founder of Pendulum Chain, a forex-optimized L1 blockchain that recently secured a parachain in the Polkadot ecosystem. As an entrepreneur with more than 18 years of leading technical and business teams, Alex has deep experience of payments, mobile and business intelligence. In 2013 Alex began researching Bitcoin and the emerging blockchain industry and has been hooked ever since.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.