DeFi Needs a Rebrand to Open Finance

TL; DR: DeFi is not all that decentralized, so let’s call it what it really is, 'Open Finance'.

DeFi Protocols are Legitimate Financial Instruments

Decentralized Finance (DeFi) has now been around for several years and unarguably presents itself as a legitimate way of earning yield. I have personally partaken in this yield for years. While the risk of this yield is still incomparably higher than that of traditional investments, it offers benefits such as wallets being easily co-governed with others, unlike bank accounts. It is borderless (I’ve used DeFi in Canada and Portugal for years), easily accessible with internet access, and removes barriers that are apparent when doing ‘traditional’ investments. The problem DeFi branding itself as decentralized finance is that DAOs (the organizations that govern decentralized application) are highly centralized, with no evidence of them becoming more decentralized.

Centralization of DAO Voting

DAOs are highly centralized and don’t live up to the claim of decentralization. For a deep dive to prove this statement, check out my LinkedIn profile to find my master’s research where I performed a three-year longitudinal analysis of DAO voting behaviours of the largest decentralized applications. Let’s take one proposal of Morpho’s DAO as Morpho is considered one of the most reputable DeFi protocols – I’ve personally used Morpho in the past. Taking proposal MIP 105 - Katana Coincentives as an illustrative example, we see there are only 14 voters. It is true that included in these 14 voters are entities made up of groups of people, and individual addresses can be managed by many people (thanks to blockchain and self-custody). However, a maximum of 14 entities is still far from decentralized. 

While I used Morpho as an illustrative example, this holds true for almost all DeFi protocols, with no sign of increasing decentralization. While low participation and high centralization of token possession is problematic, relabeling DeFi as ‘Open Finance’ would more accurately represent the industry and its current reality. I was able to perform a longitudinal analysis on DAO voting and analyze the wallet addresses themselves due to the open nature of blockchain and DeFi.

Rebranding to ‘Open Finance’

DeFi should just be called Open Finance as that is exactly what it is. This branding problem was brought to my attention initially in 2022 in a conversation with Pablo Veyrat, the founder of the project Angle Protocol. To avoid the problem of DAO governance all together investors can opt to use projects like Liquity V2 which approaches DeFi with a more ‘code is law’ approach. 

Conclusion

DAOs and use of crypto tokens for voting is far from a perfect system for governing organizations, but it is unarguably more transparent and is permissionless, and therefore should be rebranded to Open Finance.