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The outlaw future of DeFi
We’re coming up to an interesting split between fully regulated crypto activity and ‘dark-fi’ outlaw crypto. Why and how?
We’re coming up to what could be a meaningfully split in the crypto space.
First, some interesting numbers and background for context on our forecast:
A) On-chain (DEX) traders’ percentage of total crypto trading volumes has been growing, well, since it started basically. It now stands at 16.5% of centralized exchanges’ spot volumes. This is a meaningful share of the market, especially considering each Ethereum transaction costs dollars, not cents. In May 2023, for example, DEXs moved $65.5 billion worth of assets 📈
There are two reasons Americans are increasingly turning to DEXs:
Banking on-ramps like Binance US and FTX US, are no longer available while DeFi remains open for business.
DEXs provide access to thousands of tokens, many of which may be considered unregistered securities
B) International usage of privacy mixers and unregulated crypto activities is on the rise, as evident from the latest numbers shared by Chainalysis and CoinJoin.
These activities take advantage of crypto’s decentralized features, which were originally fostered by the cypherpunk movement, and we think will be increasingly utilized.
C) DeFi has become the sole means for Americans to access extreme financial products like 100X leverage and memecoins, which have gained significant traction.
D) On-chain open interest in perpetual contract DEXs has grown to $360 million, about half of it solely from the relatively new GMX on-chain derivatives exchange.
E) As economies become increasingly cashless, crypto and permissionless finance will likely play a more central role.
Who’s going to the dark side?
Today the next logical step for regulators could be to target DeFi activities.
Will they request Uniswap Labs to KYC the frontend? This poses a crucial fork in the road: “RegFi” or “DarkFi”?
RegFi: Regulated DeFi and crypto with full KYCed user interface
DarkFi: KYC resistant crypto and DeFi. Likely run by anons and/or offshore. KYC resistant clones or gateways to popular DEXs etc
While it is impossible to regulate the Uniswap protocol itself, the front end could be a target.
Meanwhile Bitcoin is being primed by Wall St. to be one of the next big asset classes. The more Bitcoin gets regulated, the more mainstream, fully regulated demand will grow (eventually even pension funds).
The more strict the regulators will be, DeFi and crypto activities will have to choose more consciously which side of KYC regulations they want to be on. The distinction between RegFi and ‘DarkFi’ will grow.
The growing demand for DarkFi will put the decentralization of its technology to the test. Non-KYC activity and DarkFi will either be battle-tested and become stronger or vanish altogether.
RegFi and ‘DarkFi’ represent two sides of the same coin (pun not intended). Ironically, they may end up fueling each other’s growth. That’s the event horizon we envision. What comes after that is anyone’s guess.
The crypto industry is evolving and we’re at an inflection point. Let’s keep building and keep our eyes open to the bigger picture.