Although cryptocurrencies have many supporters in Iran, there has yet to be a practical project defined with blockchain infrastructure, nor have we made any progress with DeFi.
A world that maximally utilizes DeFi (Decentralized Finance) can be seen as a dream for any free individual who has become weary of the issues caused by closed and centralized economic systems that have long ruled our pockets. This concept became more clearly defined and widely discussed with the advent of the Ethereum Blockchain. From the decentralization of the traditional financial system as a revolutionary movement to the creation of more tangible features, DeFi presents a new and efficient solution. Despite the rapid revolution of DeFi globally, with the trading volume of decentralized exchanges (DEX) rising from five percent of total trading volume to twenty percent, there is no sign of such a development in Iran. In this issue, we will explore the concept of DeFi in Iran and the startups working in this area.
DeFi in a Nutshell
Before we delve deeper into this report, it’s worth exploring the concept and essence of DeFi. DeFi, short for Decentralized Finance, refers to a rapidly growing movement within cryptocurrencies and blockchain (distributed ledger technology) to transform the traditional financial services system through decentralized technologies and create a new economic system that operates on the internet. The governance of DeFi projects is executed via smart contracts.
To simplify this innovation, let’s rely on a straightforward example. Suppose you want to send some currency from your current account to someone else’s account. What do you do? In this traditional financial system, you need intermediaries and interfaces like banks or financial institutions that both parties must trust and accept.
In a DeFi system, these intermediaries or their reliance on them are unnecessary; they are replaced by software or smart contracts. Instead of conducting transactions through banks and financial institutions, individuals trade directly with one another, utilizing a blockchain-based “smart contract” that facilitates market creation and transaction settlement and ensures the entire process is fair and trustworthy.
However, DeFi’s full potential extends beyond the direct transfer of assets. Next, we will examine some of this great revolution’s most significant use cases. If you’re interested in this topic, it is recommended that you study the DeFi ecosystem built on Ethereum.
How and Where is DeFi Used?
Anything utilized in the traditional financial system can also be implemented in DeFi applications. Below are ten key aspects that are made possible with DeFi:
1) Open Access:
DeFi platforms are open to anyone with internet access and a cryptocurrency wallet. This feature enables broader financial inclusion for individuals lacking access to traditional banking services due to sanctions or being underserved by a developed banking system.
2) Decentralization:
This application can be considered an inherent feature of DeFi. Unlike traditional financial systems, where a central authority controls the network’s economic infrastructure, DeFi applications operate on decentralized networks that often utilize blockchain technology, eliminating the need for permission or reliance on third parties for financial transactions.
3) Interoperability:
Many DeFi platforms are designed to work together and seamlessly share data. This feature allows users to transfer their assets effortlessly across various projects and networks, utilizing numerous services without friction.
4) Lending and Borrowing:
If you’re already familiar with DeFi applications, you might consider this feature one of the most significant and prominent aspects of these programs, following decentralization. DeFi platforms provide lending and borrowing frameworks where users can lend their cryptocurrency assets to earn passive income or borrow different assets against cryptocurrency collateral. These platforms automate the lending and borrowing processes through smart contracts.
5) Decentralized Exchanges (DEX):
Decentralized exchanges, or DEXs, represent a new generation of traditional exchanges that facilitate the exchange of cryptocurrencies between users without intermediaries. These types of exchanges see improvements in privacy security, control over funds, and a reduction in the need for an exchange and a third-party intermediary for conducting trades.
6) Stablecoins:
Stablecoins are cryptocurrencies designed to maintain a stable value by being pegged to traditional assets such as fiat currencies or physical commodities. The value of these cryptocurrencies is determined and kept stable through various methods. These assets’ vital role in DeFi and the volatile cryptocurrency market should be considered.
7) Automated Market Makers (AMMs):
Automated market makers are protocols that enable DeFi application owners and users to provide liquidity for trading pairs on DEXs. These applications use algorithms to automatically adjust prices based on supply and demand, facilitating efficient asset exchanges without relying on traditional order books.
8) Yield Farming and Liquidity Mining:
Both strategies involve users providing liquidity to DeFi platforms in exchange for rewards, often in the form of additional tokens. Yield farming and liquidity mining are methods for earning passive income while contributing to the DeFi ecosystem’s dynamism.
9) Synthetic Assets:
Some DeFi platforms offer synthetic assets that replicate the value of real-world assets such as stocks, physical commodities, or traditional currencies. This feature allows users to benefit from these assets without directly holding them, making it easier to gain their advantages.
10) Insurance:
Insurance protocols in the DeFi world provide coverage against vulnerabilities in smart contracts and potential hacks, ensuring users feel secure about their assets and investments.
DeFi has garnered significant appeal for its potential to transform traditional financial systems by offering greater access, transparency, and efficiency. However, it’s important to recognize that despite the numerous attractive opportunities in DeFi, risks such as smart contract vulnerabilities, regulatory uncertainty, and potential financial losses in this ecosystem can be relatively high.
Revolution in the World: DeFi Equals Transparency
Up to this point, it should be understood that blockchain gives DeFi its meaning and significance, providing maximum transparency to its users in contrast to traditional financial systems through its infrastructure. We want to mention successful DeFi examples on a global scale. In that case, we must first express gratitude to Vitalik Buterin, the creator of Ethereum, for making the DeFi revolution possible by creating this network and enabling smart contract functionality. Over 90% of DeFi applications have been built on the Ethereum network or one of Ethereum’s Layer 2 blockchains.
“Transforming the idea of a decentralized world through computation into part of our everyday lives is time-consuming, and until then, this idea creates cognitive dissonance for those accustomed to centralized systems.”
— Andreas Antonopoulos, Entrepreneur and Blockchain Expert
The first example that likely comes to mind for everyone as a DeFi application is the Uniswap platform; this decentralized financial platform also operates on the Ethereum network and offers cryptocurrency exchange services to users. We should also pay attention to the AAVE platform, which, as a pioneer, has created a direct system for borrowing or lending and earning interest using cryptocurrencies.
PancakeSwap and MakerDAO are notable examples that have established robust DeFi ecosystems, making them well-known.
An interesting point is the comprehensive transparency found in each of the projects mentioned, which is not observed in centralized systems or so-called decentralized applications in Iran.
DeFi: More Helpless Than Ever in Iran
For nearly a decade, the blockchain industry has been operational in Iran; however, there are many fears surrounding this industry for users. Despite the use of blockchain by large companies and major industries worldwide, this sector, particularly DeFi, lags globally in Iran. Considering the approximate number of 10 million cryptocurrency users in Iran, no startup or company can meet the needs of all these users.
According to the latest map published by the Association of Blockchain Technologists in May 2023, 140 blockchain-oriented companies and startups are active in Iran. Unfortunately, only 47 operate directly in the exchange sector, and 17 are in the media. As mentioned, the decentralized economy has little presence in Iran; even the 47 active exchange companies operate in a centralized manner, with no decentralized exchanges.
“If we don’t hear developers’ names, it’s due to two reasons. First, we haven’t provided a transparent business environment for the players in this field. Over the past four years, the biggest damage to this sector has come from the government, during which the space for education has suffered. The lack of clarity in the business environment results from poor decision-making, leading the players in this field to be uncertain about decisions and regulations. The second reason for the limited visibility of developers is the reluctance of domestic and foreign actors to be recognized in line with the spirit and culture of blockchain. The potential in this field and the human resources in Iran are very high. Still, we do not see the presence and influence of Iranian developers in the metaverse, smart contracts, and other prominent projects.”
— Abbas Ashtiani, Director of the Blockchain Association of Iran
DeFi programs in Iran are entirely centralized and divided into two areas: lending and non-fungible tokens (NFTs); neither offer the transparency associated with blockchain due to their centralized nature.
In the lending sector, platforms such as LendUp, Baripto, Vancy, and Bitpin have recently started their operations, which need to align better with DeFi’s essence. Each of these platforms provides users with a percentage of the value of the collateralized assets as a loan in Iranian rial or cryptocurrency in exchange for locking a certain amount of cryptocurrency; however, unlike all DeFi platforms, they do not share any data or financial account information about their users, some of which we will examine further.
The same problem is easily observed in the non-fungible token sector within the Iranian ecosystem. There are fewer than five platforms in Iran for the sale or exchange of non-fungible tokens with various objectives, all of which are centralized and cannot be categorized as DeFi in any way.
When Will the DeFi Wave in Iran Occur?
“Overall, there is no dynamic space for DeFi in Iran. When discussing DeFi, we need to consider two approaches: one related to access and control over software and their databases, and the other concerning their technical development on networks.”
Mohammad Sharqi, CEO of the Sor Foundation, expressed his views on DeFi in Iran in an interview with the Blockchain Research Journal:
“To date, we have witnessed two blockchain waves in Iran. The first wave, which somewhat kept pace with the world, was the wave of cryptocurrency mining, driven by the relative advantage of low energy prices in Iran. The second wave, which is still ongoing, is the creation of exchange platforms, which was not entirely unpredictable. However, pioneering countries in the blockchain field subsequently entered the realm of DeFi, and we have fallen behind in this regard. This section is the neglected part of our market.”
“Without a doubt, the next wave, or the third wave in Iran, will be the DeFi wave. However, it should be noted that for the country to enter this field, we need prerequisites for the widespread adoption of DeFi, which are currently lacking in our country. Education and then easy access are the main pillars of creating this wave. For instance, in the DeFi sector, we have very few educational tools in Persian, which do not address the concerns of Iranian users.”
“Alongside all these factors, we cannot overlook the legal and regulatory issues, which unfortunately have been largely ignored. This situation often works against entrepreneurs, as individuals cannot outline their prospects. Additionally, given the type of users in Iran, cryptocurrency exchange platforms are more appealing to investors due to their higher profitability, which has been another reason for the lack of entry into the DeFi wave in Iran.”
What Is the Reason for This Approach?
Although cryptocurrencies enjoy significant popularity in Iran relative to the region and due to economic conditions, practical projects are still being defined with blockchain infrastructure, and we have yet to reach any milestones with DeFi. Unfortunately, the approach of regulators to date has been such that not only has there been no incentive for blockchain developers, but blockchain activities in exchanges have also been restricted. In addition, exchanges face severe legal and regulatory challenges and cannot provide many services to their users. This situation has led to a lack of understanding of DeFi and the applications of blockchain among the public, who view cryptocurrencies—merely one of the many products of this revolutionary innovation—as a suitable investment asset.”
Another significant reason is the country’s limited liquidity for blockchain projects and startups. Due to restrictions regulators impose on investments in this project, many startups fail to survive from the outset. For instance, to establish a decentralized exchange and fill its liquidity pools, at least $50 million is needed for a dynamic exchange. However, which startups can attract not just $50 million but even $5 million for these projects?
Perhaps one of the most important reasons for the lack of enthusiasm from entrepreneurs and innovators toward DeFi is the public’s ignorance and distrust of these platforms. One of the critical parameters in analyzing a business is the social factors governing it. Considering the dominant traditional demographic in Iran, using a distinct and new system that lacks personal backing may be somewhat challenging. As someone who has researched this field for years, I believe this issue could be one of the significant factors contributing to the reduced attention and interaction with DeFi in Iran.
Final Words
Undoubtedly, decentralized finance (DeFi), with values such as transparency, freedom, and security, is revolutionizing finance. This technology offers individuals opportunities that once seemed impossible; however, they are now attainable thanks to blockchain and cryptocurrencies.
While DeFi projects are rapidly developing in some parts of the world, in countries like Iran, limitations and challenges—such as regulatory issues, ignorance, and a lack of venture capital—have relegated DeFi to the sidelines. Nevertheless, given the rapid changes in the world of technology and finance, we hope that these obstacles will be overcome in the future, allowing us to benefit from the abundant opportunities that the DeFi ecosystem offers in Iran.
