Aspirations and Challenges in DeFi

n the United States, my bank charges $3 for an electronic funds transfer to someone else’s account at a different bank, a process that takes 2–3 business days. Next-day transfers cost $10 while same-day transfers cost $25.

Meanwhile, in the surreal world of the Ethereum blockchain, this recent transaction cost 87 cents to send the equivalent of $6500. Such transfers usually take around 2 minutes, but they do suffer from occasional spikes in cost and confirmation times.

Coming back to regular funds transfers, one can use apps like Venmo or Zelle to send instant transfers for free. Similar (or even better) apps are available in nearly all countries. However, they usually work when recipients use them as well — which can be a problem since adoption varies a lot by demographics. User adoption is one issue that technological innovations in mainstream finance share with emerging blockchain-based transactions. They have enormous potential but are severely dependent on network effects.

As a former academic economist and engineer, I am fascinated by cryptocurrency-based systems for relatively cheap, fast, trustless, global payments, and by the use of smart contracts for financial intermediation through decentralized exchanges. That sounds like quite a mouthful — and it is. That is because, in addition to payments, we are talking about novel market mechanisms to borrow and lend money, to invest or hedge risks, to create derivative securities and to engage in speculative trading. Trading, in particular, has experienced enormous growth in recent times. Meanwhile, the overall crypto-ecosystem appears to have matured beyond the scammy ICOs of past.

Several crypto enthusiasts are interested in another aspect of decentralized finance — which is to build infrastructure to serve those neglected by main street corporations or those living under economically restrictive regimes. Many people in this group think of stablecoins — cryptocurrencies whose values are tied to the Dollar or other fiat currency — as a product category of utmost importance. This is partly driven by beliefs that popular currencies such as Bitcoin and Ether will remain far too volatile to serve as stores of value for the masses.

In our own ways, all of us — researchers, developers, users, entrepreneurs — are trying to contribute to the development of new products and use cases. As the cliche goes… good product design requires clear understanding of what users need. However, developing this understanding can be very challenging. Not least because people — ourselves included — are not always clear about what we really need. Indeed, at times some of my research projects have taken a turn that seems like a weary response looking for a good question to settle down with.

In this context, Don Norman’s The Psychology of Everyday Things, offers a masterclass in human centered design. The book — also known as The Design of Everyday Things — includes illuminating anecdotes and examples.

One of Norman’s striking observations on user experience is that people often blame themselves for mistakes when using a product, even when the errors are predictable consequences of bad design.

I am reminded of this when I see my father struggling with a change in the user interface of some app on his Android phone. My dad always blames himself. Which is silly and frustrating. When I see him struggling, I think of it as a design failure.

In an interesting twist of duality, Norman reminds us that principles that drive good design can be applied (in reverse) to make some tasks intentionally difficult for users. This can be adopted for security e.g. accidentally deleting cryptographic keys or sending funds to unintended recipients.

Product design is always challenging. Development and testing are restricted by cost, schedule, uncertain demand, features, team rivalries or misaligned incentives. But for those who strive to design and build useful products, Norman’s book offers timeless advice and inspiration.

At this point in time, there is no urgent need for people to be intimately familiar with crypto-based payments or applications. This small user base creates challenges in designing and testing products.

However, transformative change and user adoption can arrive in spectacular fashion. In November 2016, in a surprise move, the Government of India invalidated all large denomination currency bills in circulation — overnight. The idea was to catch tax evaders off guard. Instead, it resulted in months of economic chaos, especially for millions of poor, unbanked Indians working in the informal sector. However, smart phone payment apps (particularly one backed by SoftBank) got a huge boost in user adoption.

In future posts in this series, we will explore challenges in the rapidly evolving De-Fi space and examine how the community is addressing them.