Hot on the heels of our successful interview series with leading women in the cryptocurrency space, we bring you a brand new series of interviews with experts in various aspects of the digital assets ecosystem. First up, we take a deep dive into the future of decentralized finance (DeFi) with Didier Pironi, Product Manager at Ref Finance.

Ref Finance is a community-led, multi-purpose DeFi platform and the first to be built on the NEAR Protocol, a next generation smart contract platform. Didier introduces us to Ref Finance and NEAR, and shares his thoughts on some of the key risks of DeFi and how these can be managed, as well as his views on what the future may hold.

A new kind of AMM

Ref Finance and NEAR share more than just a platform; the former was initially created by the co-founder of NEAR, Illia Polosukhin, as a fully permissionless and trustless platform that anyone can use to trade or provide liquidity. Being a community-driven project, it has since seen contributions from far and wide, including further support from individuals at NEAR and Proximity Labs.

Ref’s first product is an automated market maker (AMM), similar to Uniswap but with some key differences. Firstly, Ref allows users to create multiple liquidity pools in a single contract. Secondly, it adds efficiency by allowing users to trade across these in a single transaction. And thirdly, the pool’s swap fees can be customized, allowing liquidity providers to charge higher fees for more volatile assets.

“Simply put, Ref Finance is a marketplace that allows crypto buyers and sellers to meet in a frictionless fashion,” Didier says. It is powered by the REF token, which users can stake to earn a portion of the fees generated by the protocol, as well as using it for farming and, eventually, governance.

Challenging Ethereum

Building on the NEAR Protocol allows Ref to keep transaction fees ultra-low at around $0.005 per swap, challenging the Ethereum ecosystem which has been struggling to combat high gas fees. In comparison, a swap on Uniswap V3 costs an average of $14.70 (as of 19 March 2022). 

NEAR is often mentioned alongside Solana, Avalanche and Terra as a potential Ethereum competitor. A delegated proof-of-stake platform, it focuses on security, scalability, and energy efficiency (receiving the Climate Neutral Product Label in 2021).

Traders looking to try out the NEAR Protocol can use the Rainbow Bridge (NEAR <> Ethereum) to utilize the billions of dollars in ERC-20-compliant assets from Ethereum, and eventually, from any chain (BSC, Polygon/Matic, Cosmos/IBC, and others) on NEAR.

NEAR has a unique approach to solving the scalability dilemma using a concept called “dynamic sharding” (also known as Nightshade). In layman's terms, sharding involves splitting the blockchain into multiple new chains running in parallel, called “shards”, to multiply the throughput of the network. NEAR’s approach is different to the type of sharding employed by Ethereum, however, as it allows the number of active shards to be adjusted based on current network demand. Since there is no cap on the maximum number of shards, NEAR could theoretically scale indefinitely.

Didier names several advantages of building on the NEAR Protocol: “On NEAR, in addition to low fees, very fast transaction settlements are a key differentiator. Plus, on top of the technical aspect of the NEAR blockchain and its sharding design, the community is very strong and growing. As a creator, developer, or business person, it is very easy to navigate our ecosystem and engage with our community, but most importantly, receive answers to those questions.

“However, one of the drawbacks of using an alternative layer one and/or two is composability. In other words, the ability of the infrastructure to cover many money legos (lending, exchange, launchpad, etc.). As the first entrant and with its very strong community, Ethereum still has the best composability within the space.”

The future of DeFi

As the DeFi space develops and matures, Didier sees it facing some big challenges in the coming years, but he also sees huge opportunities for the space to become mainstream. One of the main challenges, in his view, is compliance, as the regulatory burden and risk are increasing.

“DeFi will gain credibility the more it manages to embrace regulation,” he says. “Often described as a laggard, DeFi has more advocates, power and influence than five years ago (since the 2018 bull run). 

“DeFi protocol treasuries have grown substantially over the last years, resulting from a constant activity flow. Only looking at Uniswap, for example, the treasury went from $50+ million to over $2 billion in two years. This DeFi “dry powder” constitutes a great leverage for protocols to strengthen their presence in the TradFi and lobbying game.”

As a result, he sees identity and Know Your Customer (KYC) becoming “ubiquitous” in the next three years, “simply because protocols can’t scale without complying with Anti-Money Laundering laws”. KYC compliance could finally open the doors for institutional liquidity as well as improve the overall user experience.

Didier expects much of the innovation and improvement in the space to come from DAOs (like Ref itself), foreseeing that “established DeFi protocols will be more efficient at making decisions and organizing themselves into communities”. This will fuel real life applications of DeFi, such as advanced treasury functions and management; enhanced financial reporting and IFRS, US GAAP accounting; integrated payment systems; and salaries and money streaming.

He adds: “I think insurance protocols are a very undervalued “money lego” of the ecosystem, only accounting for less than 1% of the $200+ billion locked into the space. As DeFi matures and proves its resilience, big money players will mitigate their exposure by having a proportion of their portfolio insured.”

Achieving sustainable growth

Another challenge DeFi must overcome is that of sustainability of the overall model. Didier compares DeFi to the challenger banks in Europe five years ago, attracting new users with huge rewards, but points out that this model is “short-term” and “assumes exponential growth in order to pay back the debt created by such incentives”. 

“I think it is important to look at the asymmetry between the amount of capital supporting the ecosystem and actual, real demand or usage,” he notes. Simply put, the rewards available from DeFi will have to become more sustainable for this area of digital finance to prosper in the long term.

In Didier’s view, what really drives the DeFi space are all the market participants in this ecosystem: the traders, liquidity providers, borrowers, lenders, and anyone else putting money into this space. To understand and take advantage of DeFi, it is therefore important to remember one truism of economic theory: the market is always king. In other words, follow the money.

Yet despite these challenges it is clear that the opportunities for DeFi to prosper are huge, and alternatives layer one and two blockchains have an important role to play in bringing improvements and innovations to the space. Whatever the future may hold, there will be a lot for us to discuss next time we catch up with Didier!

Do you want to earn the market’s leading interest rates on your digital assets? Sign up for a Yield App account today!