How Does DeFi Cross the Chasm?
For a category that was unnamed and barely existed only two years ago, the growth in #DeFi is incredibly impressive. But within the crypto community, I don’t think it is controversial to point out that DeFi is primarily used by insiders and enthusiasts, and mostly for speculation on crypto itself.
I say this without negative judgment. In fact, speculation is productive as it allows this nascent category to bootstrap something far more consequential. And yes, the next big thing usually starts out looking like a toy.
Still, this begs the question, how will DeFi cross the chasm?
No doubt, the UX needs to improve, but I don’t think that’s all that’s left to do. DeFi needs to solve a real problem (and do so 10x better than alternatives) in order to get mainstream users engaged.
Below are three popular narratives emanating from the crypto community as to how this might happen. Personally, I am less engaged by the first two and most excited about the last. I’m curious to hear what other narratives excite you, and I hope to kick the tires on this discussion on Twitter.
1. Global Adoption: Bank the unbanked
For years, crypto has embraced the narrative that it can bank the unbanked. It’s true, a crypto wallet is a bank account for anyone with an internet connection. And a DeFi savings account is 10x better than nothing.
That said, it is unclear how and when the unbanked will arrive in DeFi en masse. To date, I haven’t seen any data indicating that this transformation is underway. All indications are that the bulk of the liquidity in DeFi today is from “whales” or large accounts.
Projects like Celo are making an effort to bootstrap use of crypto rails in the developing world by making stable, USD-pegged crypto assets easy to earn, save and transact. India’s recent reversal of its crypto ban is an encouraging new market to explore.
I am optimistic about the unbanked arriving in crypto, but unclear on exactly what the catalyst will be. Perhaps it is simply a trust gap to be filled by a combination of friendly user experience, word of mouth, and some form of insurance—all of which are happening, slowly but surely. I’m not the target user persona here, so it’s difficult for me to judge exactly where we are at in the development of this catalyst. I think a Gini Coefficient Index of DeFi may be a good indicator of long-tail, consumer adoption.
2. Institutional Adoption: DeFi as global casino; welcome, Wall St!
Proponents of this line of thinking tend to view the most important DeFi metric as “AUP” or Assets Under Protocol. With this view, it doesn’t matter if there are relatively few users, so long as they are whales that pump liquidity into the system.
No doubt, liquidity is important to the bootstrapping process, but I do think there is a glass ceiling before Wall St. wholesale pivots to DeFi. It seems unlikely that adoption will happen top-down from Wall St., and far more likely that institutional adoption follows bottom-up retail. I think that is generally true for any radically new technology platform.
3. A “Real” Crypto Economy: Non-financial consumer apps lead the way
To me, the most exciting path to mainstream adoption follows from a “real” economy built on crypto rails. That is an economy that is not in service of crypto speculation itself, but rather related to real goods and services whose economic layer is coordinated on-chain. Products like Foundation aim to bring mainstream creators and their audiences to crypto by allowing them to fund creative projects and earn new revenue streams. Reddit hopes to grow engagement by leveraging community currencies to make users actual owners of their sub’s internal economy. Imagine users taking a loan against a pair of tokenized Yeezys. Or a Redditor exchanging their subreddit’s $BRICKS for dollars and opening a savings account.
All of this is possible because of the easy composability of smart contracts. Neither Foundation nor Reddit needs to go out of their way to build this functionality themselves. The open, user-controlled nature of blockchain computing allows any developer to plug into these ecosystems and offer their users financial services. The result could be a rapid move from non-financial applications into DeFi.
My view is that DeFi gets a lot more interesting once there are mainstream users conducting real economic activity on-chain beyond crypto speculation. How that might materialize is a topic for another post.
But one extension of this line of thinking may be that the most general DeFi protocols (e.g. stablecoins, money markets, exchange) may be the best positioned to benefit from composability with non-financial apps. The simpler and more general the protocol, the easier to integrate across new verticals. More complex financial products, like specialized derivatives, may see greater tailwinds from the later arrival of institutional capital, whenever Wall St. wakes up to see the size of the opportunity has grown beyond their wildest expectations.
Given the pace of innovation and growth, I plan to be pleasantly surprised by any or all of these narratives coming to fruition.
I’m curious what other narratives people have in mind. And beyond narratives, what metrics are important to track? What do you think? How will DeFi cross the chasm to billions of end-users?