Regulatory concerns and influencer chaos look to be tightening a noose around the industry’s neck. With chilling whispers of Halloween around the corner, it’s time to face fears and talk about decentralized on- and off-ramps (DOORs) and how we onboard the world.
DOORs: The Sequel
UX is front of mind for every builder and we recently covered DOORs, their importance, and why it’s vital that they exist as immutable structures. The position of that article was that we have to fight tooth and nail to split DeFi and CeFi as much as possible.
A status check on our previously covered projects, namely ARX and Joint Protocol, suggest that they’ve bled out. So while a lot is now clearer about our path to realizing a DeFi economy, the process of migrating users is still ominous. And we’ll likely see more victims along the way.
However, it is clear that on-ramps (decentralized or not) are likely the most prolific threat to our shared mission while they still exist in this shapeless, unknown form. Our industry can innovate as much as it wants, but the blood, sweat and tears mean nothing without a safe, secure way to facilitate mass user migration.
Cloak and Dagger
Builders have dissected and stitched ideas back together aiming to solve the DOORs issue. Escrow remains a clunky process and the implications for being recognized as a money exchanger on the fiat side are too severe.
Despite this, nothing has quite yet matched up to the effectiveness of the classic P2P model. LocalBitcoins shutting its doors wasn’t just a nostalgic hit for the crypto OGs, it represented a stumble on the path to success.
Legitimate alternatives have stepped up. But the low volume, especially for products aimed at some of the world’s most densely populated areas, isn’t inspiring. The figures below are from P2PX, India’s first no-KYC, decentralized crypto on-ramp.
P2PX USDT Daily Volume (Source: counterplot.io)
Instead of relentlessly throwing the same solution at the wall and hoping it will stick, we need to reframe the issue. There might yet be a glimmer of hope lying in zero-knowledge proofs, homomorphic encryption or secure multi-party computation. All of which are privacy-focused tech.
Zeroing in on obfuscating transactions at the bridge between CeFi and DeFi may work to disconnect users’ IRL identities with their Web3 alts. Layering this tech over the current P2P orderbook model could give users just enough assurance to venture into Web3.
Of course, this isn’t bulletproof. The approach effectively takes on the guise of a mixer and the obfuscation process isn’t absolute.
There’s also a clear infra problem if any protocol aims to scale beyond the geographical limitations of the P2P model in its basic form.
End Credits
Scope out the space long enough and it’s easy to turn bearish on DOORs as a concept. Fundamental questions remain about the viability of any model while the majority of users are rooted in CeFi. This is reflected in the lack of serious projects trying to tackle it right now.
Looking back at the previously-mentioned privacy concept, we can see that the surface-level functionality could be effective, in that users could break their own CeFi-DeFi connections. Scaling such a model, and elevating it beyond inter-personal transactions, still raises questions about exposure and potentially being penalized by proxy the moment any paper trail is created.
We only need to look at the Tornado Cash fallout for an example of this blunt approach.
Does this now make a bullish case for trusted, crypto-native on-ramps instead? The decentralized entry options for would-be degens are effectively on life support. Players like Coinbase and Uniswap look increasingly like natural safe havens amidst the swathes of horror stories surrounding centralized actors.
Ironically, Central Bank Digital Currencies (CBDCs) could also carve out opportunities for DOORs. Regulatory clarity between DeFi and CeFi entities could further the development of joint UX solutions that are streamlined to support billions of users. Alongside this would be the kind of legitimization and trust that non-degens are accustomed to. But this would only be possible if DeFi is able to loosen its own fierce grip on independence.