We need DeFi regeneration: Examining the systemic future of finance

By Shaun Conway, Ph.D., founder of IXO

You have probably heard the hype around decentralized finance or DeFi — the future of financial services and the next frontier for the cryptocurrency space. Major global institutions are placing bets on DeFi — Goldman Sachs, Morgan Stanley, BNY Mellon, JPMorgan, BlackRock, you name it, they’re putting crypto on their balance sheets, offering digital asset trading and custody. DeFi transaction volume surged by 912% in 2021, according to Chainalysis, of which transactions involving illicit addresses accounted for an all-time low of just 0.15%. A positive trend, no doubt.

But speaking of placing bets, there is another side of DeFi that is arguably both helping and hindering this financial revolution — the degenerates. A crypto subculture known as DeFi Degens refers to a subculture that congregates in private Telegram and Discord channels sharing information about new DeFi projects through which they think they can generate profits…or simply have fun, in a financial economy space that has very little connection with what happens in the real-world economy.

For many degens, decentralized finance is an opportunity to develop projects that mimic financial derivative trading mechanisms found in the traditional financial economy, combined with massive multiplayer online games. Participants are offered abstruse and unpredictable tokens that have many of the characteristics of casino chips in gambling venues.

Blurring the lines between jokes and scams, and playing on the increased meme-ification of finance to lure in tribes of investors, DeFi projects are attracting a slew of trading speculation. These games use hyperinflationary token supply mechanisms to draw in new investors, with the promise of high rewards, by offering liquidity farming or staking yields that are based on Ponzi-scheme dynamics. The yields only last as long as there are new participants joining the game and staking their assets. In essence, this is a house of cards built on unsustainable inflationary mechanisms, with inherent risks to users who are not versed in these increasingly niche and complicated financial schemes. 

Long before people on r/wallstreetbets declared their love for stonks, DeFi Degens on other subreddits, as well as on Telegram and Twitter, had been shouting their misspelled motto, “HODL.” That is, hold — buy a cryptocurrency — from Bitcoin to the latest coin — and keep it in your wallet in the hope that its value shoots up again, to the moon. In 2021, a whole new breed of unabashedly self-styled “meme-coins” emerged, such as Shiba-Inu and many other imitators of the Doge meme-coin that has famously been punted by Elon Musk. These meme-coins are generic crypto tokens that often have no technical edge on first-wave assets like Bitcoin or Ethereum but have swapped those cryptocurrencies’ ominous and technically sounding vibe for wacky logos and playful names. 

Now that crypto has officially entered the teen stage of development, how do the DeFi Degens contend with adolescence and play a responsible role in the real world? Degens now have the opportunity, and moral imperative, to evolve into ‘Regens’ or regenerates, whose participation in the crypto economy can have a positive impact on the world by making investments and taking actions that have relevance to the real economy.

Since the 2008 global financial crisis, there has been a growing movement of people joining the crypto space to make a difference, with ambitions to rebuild the broken political-economic institutions and traditional financial systems that have got the world into such a mess, with the hope of creating more sustainable, transparent and accountable decentralized financial systems. This aspiration seems to have mostly been corrupted by DeFi schemes that have replicated and even amplified the greed-driven and unsustainable characteristics of the old system.  

Crypto protocols provide the building blocks for social institutions equipped to take on the challenges of today’s networked culture. The Degens now need to refocus their ambitions beyond meme coins, bored apes, fat penguins, and pet rocks and look for impactful ways to spend their finances, time, attention, and energy. So much of what is built-in crypto today has become self-referential and self-serving money games, concepts fundamentally indexed to profit and motivated by greed.

This wave of digital disruption provides the historic opportunity for us to fundamentally reshape the purpose of finance in ways that will have transformative impacts on people and the planet. We can empower ordinary people as consumers, savers, lenders, borrowers, investors, and taxpayers, to be at the center of this economic regeneration. We need to use a regenerative mindset to figure out how to use these tools for real-world impact and start to address the major problems we face around climate change and global inequity. We’ve had our fun with crypto and the DeFi degenerative moment. Now it’s time to take all our learnings and apply what we know to regeneration that can start to heal the earth and society. 

It is time to focus on projects that address real-world socially impactful outcomes. Crypto and DeFi trading have the potential to draw billions of dollars into carbon markets and leapfrog slow-moving diplomatic negotiations to drive carbon price discovery and cross-exchange carbon trading. Let’s draw inspiration from Kim Stanley Robinson’s 2020 climate-themed thriller “The Ministry for the Future,” which described a global “carbon coin” to pay for decarbonization, including by paying off oil companies to keep fossil fuels in the ground.

Already a movement is burgeoning in the industry. The Interchain Foundation’s Earth Program’s mission is to fund and build the trusted technologies, sovereign networks, and financial innovations that are needed to enable communities to prosper, regenerate the planet, and adapt to the climate crisis. Projects like the Regen Network address broken economic models that incentivize the degradation of land, destruction of ecosystems, fuel climate change. The launch of the KlimaDAO was also a huge signal of intent for a collective organization in support of shrinking the available pool of carbon credits to make carbon-offsetting projects more profitable, and gained a tonne of attention early on. Grassroots Economics has already created Community Inclusion Currencies (CICs), digital currencies that enable communities to create a token based on their future production of goods and services, so far, used by over 56,000 beneficiaries in East Africa.

The crypto community ostensibly holds an ethos of liberalism, where “decentralization” frequently stands for community self-sovereignty. With the boom in wealth creation, there is ample opportunity to build technological solutions that serve local communities in ways that are sustainable and regenerative. But in practice, little space has been made for different values to be discussed or enacted. This is why, in the absence of coordinated mechanisms to enact our shared values, we default to the lowest common denominator: profit. 

Indeed, because of this movement, vast swathes of the existing financial system are currently being rebuilt on more transparent and accessible infrastructure. But, there’s a real risk if we don’t clean it up and bring it to something impactful. It’ll get completely co-opted by land-grabbing VCs, big institutions, banks, or the likes of Meta.

The time is now to build technology that allows structures to demonstrate real economic well-being, improve quality of life, and respond to the biggest crises that are now facing humanity and the planet, due to climate change and species extinctions.

A sustainable and regenerative future can only be achieved by working together to build, promote, and deploy at Internet scale, the innovative solutions that overcome the outdated and ineffective ways that we think about and deal with economic, environmental, and social development. Failure to act would be a wasted opportunity and risks diverging from the needs of citizens for inclusive sustainable development.

Shaun Conway, Ph.D. is the founder of IXO