DeFi Intents & "The Time Problem"
The financial interoperability in DeFi is driving competition on the aggregator layer. Mainstream users will ultimately choose portals to DeFi that provide them with the best UX. Whether this is a curated list of apps, a bot that parses natural language into intents, or something in between, is a topic for another discussion. The important takeaway is that there will likely be an abstraction layer in between end users and protocols.
As one example, the convenience of being able to bridge from within a wallet with just a few clicks far outweighs the cost of digging around for a list of bridges, trying to figure out which ones are trustworthy, testing amounts on each one to figure out which one offers the lowest fees, and then waiting with fingers crossed that your money will appear on the destination chain.
Wallets are in a great position to make the process easier. After all, that should be their specialty: elegant user interfaces that simplify the experience of performing actions on-chain. Despite that, wallets have been very limited in what functionality they offer to their users.
While many top wallets offer swaps, bridging, and native staking, they do not typically offer abstracted lending or liquidity provisioning. This is because these operations have a time component; they are not settled immediately, and wallets understandably do not want to take on the liability of third party protocol hacks.
With instant settlement, it doesn’t matter who the counterparty is, as long as the user gets the minimum amount they gave permission to receive when executing the transaction. Thus we can have advanced routing, RFQs, and fancy intent and solver models in between.
The result is that your friendly wallet/portal will let you swap and bridge, but fails to offer simple, one-click access to the broader spectrum of DeFi products.
The Missing Piece
The key component missing here is risk assessment.
Wallets that do have built-in apps, Safe and Instadapp being a couple of examples, put the responsibility on the user to choose the app, thus opting into the risks. Their message is basically:
”We’re going to give you the option of choosing between AAVE and Compound for depositing your assets for yield, but you will know that you are choosing AAVE and Compound, and it’s up to you to study how AAVE and Compound work before depositing with them. If there’s a hack or loss of funds, it’s not our fault, nor our problem.”
But the real UX opportunity is to abstract away the need for the user to read the often-biased protocol docs in an attempt to understand the risks and limitations of the product.
Note: I’m still a fan of the DYOR mentality, but as the market matures, the quantity of research required to make a sufficiently-informed decision should decrease with time.
Assessing Risk
There are a few ways that risk assessment may be lifted from the user’s back. Complete offloading of this burden likely involves protocol insurance to cover against losses from hacks. Partial offloading likely relies on third-party rating agencies to give the user some quick stats to at least help them understand how much further due diligence may be required given their risk appetite. I’m going on the assumption that this is also on top of curation by wallets/portals.
Ratings
Ratings agencies (or DAOs?) may develop significant reputation over time, similar to what has evolved in traditional finance (i.e. Moody’s).
DeFiSafety provides a nice example of this, with a multidimensional rating methodology and aggregate scoring.
Standardization
Standardization is also important here. If wallets are to connect users with yield, there need to be a couple of standardized definitions of the broad term “yield”.
Not all yield vaults are the same, and not all loans from lending protocols are the same. Risk needs to be further abstracted into categories, much like bond ratings in TradFi.
For example, consider fixed-rate loans that resemble a zero-coupon bond. As a lender/owner of a bond, I may not care what protocol originated the loan, as long as it is tokenized (so I can sell it, if necessary, before maturity) and has an B or higher rating for liquidity.
Insurance
Could insurance protocols also play into the solution to this problem? If wallets knew that user funds were insured, they may allow single-click deployment of assets.
If the question is “In what scenario might a wallet add a native ‘lend’ button that users can click to deploy assets into one or more third party protocols?” I think the answer likely includes some type of insurance.
As of now, insurance may be worth the additional cost while yield/interest rates in DeFi are high, but who will pay 4% (current cost of Aave cover on Nexus Mutual) for insurance on aUSDC yielding 6%? Not many, so we either need better insurance companies/protocols or matured security (more audits, better audit methods and risk analysis, and time deployed).
Conclusion
When is DeFi going to be ready for Joe Public? Certainly not anytime soon. But there will be a day when wallets and front ends abstract away the complexity of interacting on chain. The building blocks that DeFi offers will be put together in a way that mainstream users can deploy assets in a single click without heavy due diligence. The biggest missing element right now is a way to assess, measure, or protect from risk on behalf of users. Various mechanisms exist in traditional finance such as rating agencies and many types of insurance, but this has not yet matured in DeFi, and feels wide open for capture or disruption.
And a big thanks to our sponsor Size, building a DeFi lending marketplace with unified liquidity across maturities. Coming soon!
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