Decentralized finance (DeFi) models are becoming more mainstream, however, there remain significant questions about Decentralized Autonomous Organizations (DAOs), according to Nick Abrahams, Global Co-Head of Digital Transformation at Norton Rose Fulbright.
DeFi and DAO are two concepts born in Web3, which many executives may have heard of but not yet familiar with.
Digital Nation Australia asked Abrahams to break down DeFi and DAO for business leaders.
Challenge
According to Abrahams, DeFi is the creation of an alternative financial system that exists in a decentralized world.
“You can pretty much do whatever you want in a financial sense that you could do in real life, you can do that now in DeFi, so borrow and lend and so on. It’s largely stayed within a core group of DeFi people, but what’s been very appealing is that there are amazing interest rates you’re lending on effectively on DeFi platforms, so that you can be up to 20% a year,” Abrahams said.
Money, insurance and shopping comparison Finder is an example of an Australian company that operates a DeFi platform.
“They have a platform where you can deposit money efficiently and get returns similar to DeFi. We are starting to see more of this, but it will take some time for traditional banks to become familiar with cryptocurrency and decentralized finance.
While banks don’t traditionally recognize Bitcoin as collateral, Abrahams points to Goldman Sachs’ recent announcement in the US for the first-ever loan deal fully secured by Bitcoin.
“DeFi is slower with the arrival in the domain flow. But if you look at where we’ve come to with ANZ hitting a stablecoin, we know they’ve obviously been watching the DeFi world very closely and a stablecoin is an essential part of DeFi.
CAD
Abrahams explains that DAOs are similar to decentralized crowdfunding, where a group of individuals joins a smart contract, where their token reflects their ownership and voting rights.
However, DAOs have yet to enter the mainstream, and in the form they currently exist, Abrahams is reluctant to say they ever will.
“I’m not sure about the future of DAOs because you have at one end of the spectrum, a kind of techno-utopian ideal, which is that we should all vote on everything. And that doesn’t work for a complex business,” he said.
The second generation of DAOs that come forward are divided into small governance committees that make decisions, he said.
“It looks a lot like a corporate structure. I mean crypto purists are going to hate for me to say this, but that’s actually where it’s headed.
Abrahams also points out the legal challenges of DAOs because they are legally considered partnerships with all equally responsible persons.
“I’m a little hesitant [DAOs] and I think we’ll have to see a little more work on them before they’re ready for prime time.