Better Accounting is Needed For the Next DeFi Boom
The word "boom" is liberally thrown around in the world of finance. But when it comes to the DeFi boom, the term is well earned. In just one year, the total value locked in DeFi protocols grew from $1 billion to over $120 billion.
All booms eventually come to an end, however, and DeFi was no different, falling from a peak of nearly $180 billion to around $50 billion today. Still, one cycle is no reason to abandon DeFi protocols altogether. In fact, what's needed is a better understanding of how to account for them.
The complexities of DeFi accounting
All businesses need to have some form of accounting: for tax purposes, to keep track of inventory, to measure profitability, and so on. The same is true for DeFi protocols.
The problem is that traditional accounting methods are not well suited for DeFi protocols. For one, DeFi protocols are often built on Ethereum, which means they are subject to Ethereum's gas fees. This makes it difficult to accurately track the cost of running a DeFi protocol.
In addition, most DeFi protocols are decentralized, which means they do not have a centralized point of control. This makes it difficult to track who is responsible for what within the protocol.
Moreover, DeFi protocols often use complex financial instruments, such as derivatives and synthetic assets. This makes it difficult to value the assets on the protocol. Not only that, handling payments for a remote, distributed team, often in crypto, is a challenge in and of itself.
Finally, because DeFi protocols are often built on Ethereum, they are subject to Ethereum's volatility. This makes it difficult to predict the future value of the assets on the protocol.
The solution: Web3 accounting
Bulla Network is a Web3 accounting platform that handles accounting, invoicing, and payments for both TradFi and DeFi protocols.
Bulla Network is designed to handle the challenges of accounting for DeFi protocols. In the next DeFi boom, users will demand more transparency and accountability from their protocols. Web3 accounting platforms like Bulla Network will be essential for providing that transparency and accountability.
When considering investing in a traditional financial institution, investors scrutinize the accounting practices of that institution. The same should be true for investing in a DeFi protocol. From Celsius to Voyager, massive failures in Web3 financial accounting have led to billions of dollars in losses. In the next DeFi boom, we can't afford to have the same thing happen.
After all, blockchain emerged as a response to the failures of traditional finance. In the 2008 global financial crisis, it became apparent that our financial system was in need of a major overhaul. The current system is too centralized, too opaque, and too open to manipulation. Mortgage-backed securities, for example, were at the heart of the crisis. They were complex financial instruments that no one really understood. And when the housing market collapsed, those securities became worthless.
Accounting discrepancies were also to blame for the crisis. For example, Lehman Brothers used something called "Repo 105" to hide its true financial condition. Essentially, Lehman would temporarily move assets off of its balance sheet just before issuing financial statements. This made the company look healthier than it actually was. Beyond Lehman, Bear Stearns and AIG were also found to have used similar accounting tricks.
The point is, traditional accounting practices are ripe for abuse. And in the next DeFi boom, we need to be sure that protocols are using accounting practices that are transparent and accountable.