So, not tiny, but compared to other financial markets, not that significant. Therefore, after seven years the question remains, is DeFi to remain merely a niche sector or can it, indeed, realise its potential and really challenge traditional financial markets? Smart contracts are very much a key driver in the DeFi sector, with IBM defining them as: “Digital contracts stored on a blockchain that are automatically executed when predetermined terms and conditions are met”. Linking with this, decentralised apps (dApps) are applications which use smart contracts and offer the ability to offer many of the services that historically banks have offered - making payments, lending, saving and buying and selling of assets. 

Meanwhile, tokenisation is steadily becoming more prevalent as a natural extension of TradFi for existing asset classes such as equities, debt instruments, commodities, real estate and even national currencies in the form of stablecoins and CBDCs. However, as our lives (including the provision of financial services) become ever more digital, physical national jurisdictions potentially become less relevant - yet local laws and regulations will still need to be adhered to. Digital markets will increasingly need to be globally coordinated if safeguards and investor protection are to remain in place. Therefore, surely there will be the need for consensus as to what actually needs to be regulated, and why:

• the protection of consumers? 

• for market stability?

• to maintain confidence in the markets?

• to encourage innovation?  

DeFi opportunities

• DeFi is inclusive: provided you have a digital wallet and have access to the internet, you are able to use DeFi and not have to rely on banks and other money transfer firms.

• Transactions are transparent: DeFi offers the ability to monitor actions in real-time including the repayment of loans, alterations in interest rates and releasing collateral. As there is greater transparency, users ought to have more confidence and trust.

• Smart contracts: it is possible to automate many traditional risk management and compliance monitoring functions.

• Data is held cryptographically and decentralised: blockchain-powered platforms hold data securely, and permission as to how and when access to data can be pre-programmed before a DeFi transaction is entered into. Since data is decentralised, it has built-in disaster recovery credentials and offers enhanced levels of security from cyber-attacks.

• Disintermediation: DeFi use of blockchain means there is only one ledger/database that the various parties can have access to and, being digital, it is possible to send and receive payments faster and cheaper (especially when dealing on a multi-jurisdictional basis) without having to engage with several intermediaries. This generates cost savings and efficiencies in terms of transactions and reporting.

 DeFi challenges

• Change: DeFi technology is new and regulators and institutions are cautious of change since this could impact on investors, potentially resulting in fines and compensation as well as damaged reputations. Furthermore, many of the systems and procedures are yet to be fully tested although the recent collapse in crypto prices has, for some DeFi platforms, been a baptism of fire.

• Regulation, or lack of: Swarm Markets in Germany was the first licensed DeFi platform globally. There is minimal, if any, protection when things go wrong and not being regulated means that the usual investors compensation schemes are not applicable. The platforms do not need to have insurance or hold capital adequacy reserves for most DeFi, and there are no laws enforcing capital reserves for DeFi service providers.

• Liquidity: many DeFi platforms rely broadly on private clients for transactions potentially creating challenges in times of stress, as we have seen recently. Celsius is an example of a DeFi App which has struggled as investors look to encash. Lack of liquidity has forced prices down.

• Decentralisation: this can present a challenge for regulated investors because they may end up trading with parties which would usually struggle to complete standard AML checks. Given the fines faced by financial institutions in the past around AML, there will be a reluctance to be caught again. Because some DeFi platforms are truly decentralised, there is also the added difficult issue of getting redress (as you do not know who is responsible) in the event of unlawful actions.

• Hacking: this is, and always will be, a risk where money is involved. In 2021, over $10billion was hacked. However, in a rather bizarre incident a so-called ‘ethical hacker’ stole over $610million from the Polygon DeFi platform only then to return it.

• User experience: as with many matters to do with crypto, DeFi is not that easy for a novice as the user has to deal with digital wallets, create, and more importantly, store and remember private keys (aka passwords).

Money and banking.com summarises the challenge DeFi faces since currently much of DeFi is centred around cryptocurrencies: “While the solutions employed in TradFi are often inadequate and incomplete, features such as counterparty identification and centralized verification make them both more complete and more effective than those currently in place in the world of crypto/DeFi.  Ironically, addressing the severe deficiencies in the current crypto/DeFi infrastructure may prove difficult without making highly unpopular changes that make it look more like TradFi - like requiring participants to verify their identity.” 

However, irrespective of the above, DeFi certainly offers new opportunities for traditional, regulated institutions since they understand the added transparency and traceability that using blockchain offers. Equally, as we see DeFi being embraced there will inevitably be some losers such as the brokers and clearing houses who could no longer be needed as much. An example of the growing importance of the DeFi market can be seen in the $100trillion asset management industry. 

JPMorgan Chase’s announcement that it is to tokenise its mutual funds and “introduce $trillions to the DeFi sector” could well prove an inflection point as other fund managers follow suit. This type of activity could well take DeFi from being niche to mainstream and, in turn, encourage other firms to make their borrowing, lending, and services available on DeFi platforms. After all, there is no shortage of customers looking for higher yields, quicker settlement, different investment opportunities, greater transparency, lower costs and generally more flexibility with their money. DeFi offers the potential it can deliver on these wishes.

Source: Teamblockchain

A combination of technologies such AI, Bigdata, IoT blockchain etc., offers the promise that much of the current regulatory reporting and compliance functions could be automated and coordinated on a worldwide basis. This would enable regulated companies to design and market financial services products and services on a global basis, at a fraction of the regulatory and compliance costs they currently incur.

In a survey carried out by LinkedIn, blockchain-related jobs were the most sought after in the US, the UK, France, Germany and Austria. This growth is not being recorded in other traditional businesses/industries but, interestingly, different industries are looking at ways to inculcate blockchain technology into their normal workflows. Companies such as J.P Morgan, Wells Fargo and other firms on Wall Street currently have preferences for employees who have knowledge and experience in cryptocurrencies, or the technology that powers them - i.e. blockchain. Likewise, with growing evidence of an impending recession in many jurisdictions, there will undoubtedly be on-going pressure to reduce costs and look for new ways in which to be more efficient. So, we could well see even greater demand for those with blockchain skills and knowledge.

Compensations for blockchain engineers 

Source: Hired.com

Hired.com re-iterates the huge growth for those with blockchain skills - even when compared to other jobs in the IT sector. Indeed, in an article from Julian Messner at Robert Walters (a leading global recruitment company), recently said: “Across all sectors, there is a strong demand for blockchain IT professionals who are able to leverage their technical expertise to improve operations and drive business objectives. This will require developers to have both expertise in blockchain – already a niche skill set – as well as familiarity with the industry they are developing applications for. For example, in fintech, blockchain product owners, backend or front-end developers, and UX/UI designers are required to have some level of experience with e-wallet and online payment gateway solutions as well – making it hard for companies to find skilled candidates. The shortage of skilled talent has seen inflated salaries, with blockchain professionals commanding 30% higher salaries compared to other IT professionals.”

Advantageous to this is that opportunities in and around blockchain are varied and span many industries and insomuch as the blockchain industry is considered a technical one, there are also plenty of non-technical jobs available to all.

Blockchain vs other developer roles

Source: Hired.com

Below are some of the job opportunities in the space and what they entail:

1. Developer

There is a massive demand for the right people to create blockchain-powered applications and the required architecture. If interested in such a role, programming languages such as Python, C++ and Javascript will be useful.

2. Quality engineer

The quality engineer is responsible for making sure every aspect of a blockchain-powered service or product meets agreed quality control standards. Blockchain quality engineers ensure projects are ready before they are released to external clients, and then are charged with ongoing quality checks. A mix of technological skills and strong communication skills are key characteristics that employers will be looking for. 

3. Legal and/or compliance roles 

There is a huge demand for staff in legal and compliance roles who have an understanding of blockchain technology. The rules and regulations around the use of blockchain and the digital assets that they create are still being formulated in many jurisdictions. However, as we see organisations embracing blockchains and using smart contracts, legal and compliance staff will be required to have a thorough understanding of the legal/regulatory implications as well as the technical aspects of smart contracts.

4. User experience (UX) designer

Arguably, the design and how people interact with those applications and services using blockchain technology is holding back adoption, as often the language used and the procedures are often more appropriate for more ‘techy-orientated’ people. The UX designers cannot be overlooked since they are responsible for the creation of a user interface that will hit all the right buttons in the minds of users. This job role expects designers to have an eye for detail and to be creative and diligent.

5. Blockchain project manager

These are the people who are charged with the responsibility of allotting the different aspects of blockchain projects to people who possess the relevant skill sets. Blockchain project managers typically have the same expertise as conventional project managers, albeit with technical knowledge of how to use the technology.

You can find blockchain jobs on sites such as CryptoJobList, Crypto.jobs, CrytocurrencyJobs.co, to name just a few. However, as we see more industries using blockchain technology it is not only the specialist recruitment firms but much larger and, in many cases, global recruitment firms such as Robert Walters, Reed, and Indeed which are likely to have clients looking for people with blockchain expertise. An entire universe of blockchain job advertisements exists out there, and for those looking for a job using blockchain technology there are also a variety of courses available. Here follows a small selection:

• Prospects - lists university courses

• BCS (the Chartered Institute for Technology) - offers training for: “Anyone who wants to understand more about blockchain and the impact it can have on their organisation and society.”

• Invezz - provides a list of European universities and colleagues that have blockchain courses

• European summer school - “The learning goals of the Blockchain Fundamentals course consists of knowledge and practical skills components.”

• Ixlgroup, in the US - “The course will cover how to use the latest tools to build Blockchain applications, set up your own private Blockchain, deploy smart contracts on Ethereum and gain practical experience with real-world projects.”

Pay-to-play was the first model involving gamers having to pay to play games without any earning opportunity. The second model involves free-to-play (self-explanatory), whilst the third and latest model is the play-to-earn (P2E) ecosystem. 

The play-to-earn (P2E), or sometimes called play-to-pay, business model (a recent innovation in the gaming industry) offers gamers ownership over in-game assets and thus allows them to increase their value by actively playing the game. It provides users with the opportunity to not only add value, but exchange and/ or sell the assets they have earnt/played for to other gamers. Players are creating value for other players and the developers by participating in the in-game economy and, in turn, they are rewarded with in-game assets. These assets may be anything - NFTs, cryptocurrencies or in-game resources that are tokenised on a blockchain. Most P2E games have native tokens for in-game purchases and trading between players and they derive value through the use of their tokens. Axie Infinity, a leading example of P2E games, counts on players making a hefty upfront investment in Axies (the game-specific NFTs).The in-game assets earned from playing can then be traded at an appreciated price with other gamers. 

Whether or not you earn from playing, or the amount that you earn, depends on the length of time you invest in the game, the game's popularity, and the demand for the in-game assets or tokens from other gamers.

How the play-to-earn model stands out

• asset ownership - play-to-earn gaming platforms, unlike the traditional game, use NFTs which are owned by the users. Gamers can mint and customise NFTs. They can also be transferred to NFT marketplaces for sale or converted to cryptocurrencies or fiat currency. NFTs, used in navigating through the game, can come in the form of avatars, land, pets, etc.

• decentralisation - play-to-earn ecosystems typically operate under a decentralised governance framework, allowing their users to participate in crucial decision-making processes.

• earning opportunities - aside from offering players interesting gameplay, play-to-earn gaming platforms make earning opportunities available for players. Gamers can collect in-game assets whilst they carry out different tasks, depending on the gameplay.

Is the business model sustainable?

The sustainability of the business model depends on many factors. Indeed, problems linked with this concept exist since the appeal of earning money could dilute the gaming experience. One of the identified risks is a game's ability to continue growing the economy it intends to build. According to Adrian Kolody, a DeFi startup founder, the only way a play-to-earn model can be sustainable is by making sure the game's users are of high quality. This may not be true for all cases. For instance, Axie Infinity was recently reported to be going through a difficult time - Axie is tied to crypto markets and players get Smooth Love Potion (SLP) tokens for each game they win and, in larger tournaments, can earn another cryptocurrency, Axie Infinity Shards (AXS). The company, as of October 2021, had raised more than $160 million from investors and Sky Mavis reported that Axie Infinity crossed 2 million daily users that same month. However, in March 2022, Axie was said to be in deep crisis and had lost about 40% of its daily users; AXS price had dropped to $56 from $165 whilst SLP (which had earlier traded as high as 40¢), was at 1.8¢. 

Sources: Coinbase, Sky Mavis

Unsurprisingly with the crash, players lost their money. Although Axie announced its plan to reimburse the victims and repair its infrastructure, it is yet to do so. Microsoft, which paid over $68billion for Activision Blizzard, was looking to start offering play-to-earn assets as a way in which to recoup some of the capital it had spent acquiring the business. Activision Blizzard had polled gamers to assess interest in NFTs, despite the Game Developers Conference’s State of the Game Industry Report declaring that the majority of the 2700 game developers surveyed having said they had no interest in NFTs. So, the jury is very much out as to whether Microsoft, or indeed other on-line game developers, will expand their play2play business models.

Although the play-to-earn model may seem too good to be true, it actually is. Whilst some players have only eked out small winnings or have never won, many gamers have already made significant money. However, as to be expected, some unscrupulous providers are in the business for personal gains and to postpone payoffs by preventing you from reaching your payout target. It is advisable to be prudent and do your research so as not end up wasting your time, or at worst, losing your money.