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The decentralized finance (DeFi) economy stands at a fascinating juncture. While the recent market downturn has undoubtedly affected trading and market sentiment, contrastingly, interest and awareness in DeFi’s technologies have never been greater. Education will play a key role in the next phase of DeFi adoption. As mainstream interest accelerates, users need financial literacy to navigate the peaks and troughs of the market effectively and understand the degree of risk appropriate to their own profiles.
Blockchain, along with the DeFi sector it powers, remains a nascent technology, comparable in its current stage of development to the internet in 1997. Considerable development remains to be done to unlock its full potential. Securing mainstream adoption will depend on the cultivation of a straightforward user experience.
Simplicity is tied to education, and education relies on sustained engagement over time. To successfully untangle the user journey in DeFi, gamified experiences can be deployed to help end-users understand the innovative tools available and ultimately drive greater adoption.
The user journey from analog to digital
Historically, new financial infrastructure has often been an attack vector. Leonardo DiCaprio’s filmography provides one such notable example. Catch Me If You Can recounts the story of con artist Frank Abagnale, Jr. pursuing affluence through check fraud — an exploit rife in the days of its widespread introduction and still prominent today. Nevertheless, despite their age, check use remains relatively common. Why? It comes down to trust and simplicity.
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Just like modern e-payments, the paper instrument represents a discretionary transfer of value processed and validated by a centralized institution. It originated to remove the need for carrying large amounts of currency and evolved to remove knowledge of a payee’s bank details. What lessons does the development of checking hold for DeFi?
Checking may be old-fashioned, but it has had plenty of time to become a refined and trusted operation. DeFi also needs time to iron out its bumps. The average DeFi user will have multiple wallets and engage with several different chains when transacting. Currently, the clunky interaction makes it easy to make a mistake, and experiencing some problem or other is almost a rite of passage. As such, DeFi has yet to replicate the reliability that end-users are used to.
Gamification is a tool that can be used to create incentives and introduce accountability that encourages risk-averse behavior in DeFi. It is a tool that has well-established benefits, with knowledge retention increasing by 30 percent when gamified techniques are introduced. Tim Ferriss, author of The 4-Hour Work Week, is also a major proponent of gamification for accelerated learning.
Gamification has been used to inspire confidence in users experimenting with new products and services, particularly in the realm of finance. Custodial trading platforms have capitalized on this trend massively, allowing users to set up risk-free demo accounts or robo-advisors to manage their funds. Coinbase has implemented a learn-and-earn tactic that gives users short tests and the opportunity to acquire crypto when they successfully complete them. Incorporating similar processes into DeFi would be extremely beneficial for user adoption.
Gamified features can shape the user experience into a personal journey with emotional affiliation, and playing on human psychology could make this even more potent. Given that the stakes are typically much higher in DeFi when managing your personal finances, and considering the robust sense of community on certain networks, perhaps protocols could overlay a more competitive experience for users. For example, failure to complete an educational challenge would mean a peer on the network would receive the reward instead, as in commitment platforms such as stickK.
Financial education is crucial not only for navigating scams and other risks, but for increasing user adoption. For many, the virtues of DeFi are lost in a wave of contradictory and confusing news and information. One might compare the 2022 crypto crash to the 2008 financial crisis, which was hard to grasp until The Big Short was released.
Both instances can be characterized by overleveraged centralized finance (CeFi) providers leaving retail investors to bear the brunt of the fallout. Bitcoin and DeFi had emerged as escapes from this cycle, so when the crypto markets crashed and seemingly fell victim to the same conditions they were intending to prevent, it was naturally perceived as a failure.
On the contrary, DeFi performed quite well amidst the market crash. Many of the major protocols continued to operate on the strength of over-collateralization. Thus a paradox develops, where the pain points of traditional finance are replicated by CeFi on the blockchain, representing a failure to acknowledge the genuinely transformational powers of DeFi. In actuality, it should have corroborated the case for DeFi.
The exact conditions cryptocurrency hoped to avoid re-emerged with CeFi companies operating like banks on the blockchain, masquerading as financial innovation. To hold true to the original values of crypto, prospective users must be educated on the major differences between types of crypto infrastructure. True decentralization is far from ubiquitous in the crypto economy, and users need to be empowered to understand the infrastructure that best fits their needs. Building such knowledge ultimately empowers users financially — knowledge is power after all.
Doing your own research
For all of its anarchistic undertones, the true potential of DeFi can only be unlocked through regulatory clarity. The knock-on effects would be beneficial for public education, easing confusion and providing clear guidelines for operators and users. After all, if uninformed investment decisions are to be avoided, the law should be clear, precise and predictable.
Opportunists have always exploited spaces where regulation is lacking; therefore, regulation should be clear, robust and focused on creating fairer financial infrastructure — guidelines that level the playing field for stakeholders without stifling innovation.
DeFi can lay the foundations for a globally distributed and inclusive financial system. Its success will rely on combining the benefits of financial education, ease of use, and clear regulation to escalate adoption. This experience must be user-friendly, aiding users in making informed decisions with innovative technology. Only then are individuals appropriately equipped to navigate the road to financial sovereignty.
Marcel Harmann is CEO and cofounder of THORWallet DEX
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