Does Vitalik really understand DeFi?

Author: Alex Liu, Foresight News

Allegations Against Vitalik

Vitalik Buterin's controversial views on DeFi stem from a reply he made to a post that accused him of poor communication on the topic of DeFi, which stated:

"Vitalik, I think one reason people are confused or frustrated by your views on DeFi is ------ poor communication:

It seems to you that 'DeFi' is just the mining craze of 2021 and Ponzi schemes; but for many others (I would say most people), 'DeFi' means saving and borrowing on Money Markets like Aave, CDPs like RAI (which you also mentioned!), and Synthetics. These are all healthy decentralized financial applications ------ the yields come from borrowers, transaction fees, etc. (Editor's note: CDP, Collateralized Debt Position, is a decentralized stablecoin mechanism, with Maker being another project, whose decentralized stablecoin is DAI.)

Perhaps this is why people feel confused, why Vitalik seems to oppose DeFi but supports gambling/prediction markets like Polymarket and centralized stablecoins like USDC.

I agree that many of the 'Ponzi economics' that have infiltrated the DeFi ecosystem can only mean a temporary boost in certain metrics, but that is not all of DeFi."

Vitalik's Response

" The yields come from borrowers, transaction fees, etc.

Yes, and that worries me. Because it feels like an ouroboros: the value of crypto tokens lies in the fact that you can use them to earn yields, and those yields are paid by people trading crypto tokens.

The answer is clear, for example: the yields for those getting 8% annual interest in dollars are paid by those who are leveraging 2x long on ETH at 8% annual interest, but this means the DeFi market exists downstream of the ETH market, so while DeFi may be great, it is fundamentally constrained, and cannot become a breakout innovation that pushes crypto technology to another 10-100x adoption.

That’s why I want to see a story about where yields come from or could come from, rooted in external things. I’ve heard some seemingly reasonable candidates! For example: due to fundamental structural reasons, cryptocurrencies can persistently maintain higher efficiency in international currency transactions. I want to hear more."

Ouroboros, the ouroboros

Vitalik's remarks sparked heated discussions, with many influential figures rebutting them:

Numerous Rebuttals

Ken Deeter, Partner at Electric Capital

My instinctive reaction to Vitalik Buterin's comments is: "Doesn’t this describe all finance?"

Most finance is about "people expressing their views on the future through various tools, then changing those views through a multitude of mechanisms, and creating markets for those who want to take the opposite view."

In terms of structural advantages, I believe DeFi through blockchain has a major advantage: trustlessness allows more capital around the world to participate in financial opportunities that they previously could not access.

The passive capital you see in DeFi proves market liquidity or lending liquidity ------ I bet that for many DeFi users, this type of opportunity is hard to find outside of blockchain, while automated markets make it almost trivial. As more RWA comes in, these opportunities will increasingly overlap with today’s tradfi.

Yes, in 2020, "Food Tokens" were not super efficient, but there were a lot of secondary effects ------ testing spot markets, testing clearing systems, testing what happens when the chain is congested, validating the demand for the block space explosion we see today, and other positive impacts.

New platforms often become mainstream through use cases that many initially view as toys. These platforms gain enough traction to mitigate the risks of new technology, paving the way for mainstream adoption. Today's DeFi is hard not to go through the same process.

PaperImperium, KOL

"Vitalik's remarks reflect a misunderstanding of human economic history.

You could equally say that all human markets are downstream of a few agricultural markets. However, barley is not necessarily a larger foundation than all 'downstream' markets."

Cryptohuntz, CEO of Alphaverse Capital

" A failed perspective from Vitalik.

The value of any asset in the world, aside from holding or enjoying it, lies in your ability to financialize it and earn yields.

Decentralized financialization enables users to compete with large companies and intermediaries to obtain their yields."

Vitalik's Humorous Response

In response to the criticisms directed at Vitalik, someone defended him by saying: "You might be upset with Vitalik's comments on DeFi, but he is coming from a business standpoint." Vitalik humorously replied, "In fact, I was sitting on a recent flight, and I was in economy class."

Conclusion

The editor also strongly opposes Vitalik's views. Does Vitalik really understand DeFi? The answer might be "Yes, but not necessarily correctly."

Vitalik is the philosophical source behind Ethereum as a technological platform; however, his understanding of finance and DeFi may not be accurate. We do not need to over-mythologize him. In fact: "Without DeFi, Ethereum's price might still be at 400."