Why DeFi is the future of finance
DeFi, or Decentralized Finance, is a buzzword that engulfed the last cycle. Kings and Queens were made and slain in the last bull market on the back of innovative and sometimes dangerous battles for yield. We, at redefined, like to define DeFi as the full suite of financial products that can be offered in a non-custodial and disintermediated way (lending, staking, borrowing, yield generation, swaps, bridges, etc,).
Restaking has been the torch bearer of DeFi in this cycle, competing against other more exciting and younger narratives like DePin, AI and gaming. According to Galaxy Research’s report on Share of Crypto VCs investments in Q2 2024, Gaming/Metaverse/NFTs occupied 24% of the pie, Infrastructure (DePin) 15% and Defi about 4% (Lending/Exchange holds 12%, unclear if DeFi activities fall under there).
While garnering less attention and capital than the last cycle (DefI & Lending/Exchange ~46% in 2021), we believe that DeFi is the primary and ultimate killer use-case of crypto and blockchain technology by allowing for transactions without costly intermediaries.. Unlike the early days of Bitcoin, which aimed to decentralize currency, DeFi extends this decentralization to the entire financial system, offering unprecedented transparency, inclusivity, and efficiency. DeFi, a newcomer to the financial system, starts by addressing greenfield, niche market opportunities that are under-served by incumbent capital markets, before going on to capture more of the financial system. This is an industry that is so large (the largest) that we cannot really find a figure to quantify it (many trillions of dollars). DeFi stands to capture more and more of that market share which will catapult DeFi to the top of the use-case pyramid.
Real-World Evidence of the Shift to DeFi
Major financial players and crypto exchanges are investing heavily in DeFi projects, signaling a significant shift. For centralized exchanges, custody of customer deposits is primarily seen as a cost to business (unlike banks) given that most major exchanges do not automatically generate yield from such deposits. Negligence and custody mismanagement can lead to catastrophic results (see FTX, obviously, and the WazirX hack more recently). This, along with the growth potential of DeFi, is why we have seen most major exchanges begin to develop DeFi applications like Binance’s Web3 Wallet and Coinbase Wallet.
According to DeFi Lama, the total value locked (TVL) in DeFi protocols surged from $1 billion in early 2020 to over $175 billion by the end of 2021. Today, as the bull signs are popping up, the TVL in DeFi protocols has recovered from a low of sub-$40 billion in Q4 of 2023 to hover around $100 billion in Q2 2024, with signs of steady and sustainable growth. CoinGecko recently reported that trading volume of the top 10 Spot DEXes increased +15.7% in 2024 Q2, bucking the trend of all other exchange segments (including CEXes) which all saw a decline.
Uniswap, the leading decentralized swap/exchange, has averaged over $47 billion a month over H1 of 2024. Swap aggregator 1inch grew 20% from Q4 2023 to Q1 2024 alone to reach $42.9 billion in total volume. Lido’s current TVL for its liquid staking product stands around $32 billion, and Eigen Layer is currently hovering around $9 billion TVL for its ETH restaking product.
Traditional financial institutions are also taking note. JP Morgan has (confusingly) been a leader in its institutional DeFi through its Project Guardian. Goldman Sachs has also thrown their support behind real work asset tokenization on blockchains. Standard Charter has been vocal about its bullish views on crypto and DeFi, along with their generous BTC price predictions.
The Advantages of DeFi
DeFi offers the opportunity to have a more efficient and equitable financial system through:
Transparency and Security: DeFi operates on blockchain technology, ensuring that every transaction is publicly recorded, reducing the risk of fraud. Smart contracts automate processes, enhancing security and minimizing human error.
Accessibility and Inclusivity: DeFi democratizes financial services. Unlike traditional banking, which often excludes large segments of the population, DeFi is accessible to anyone with an internet connection, facilitating global financial inclusion.
Innovation and Flexibility: The open-source nature of DeFi encourages rapid innovation. New financial products and services, such as yield farming, liquidity mining, and decentralized exchanges, are continually emerging, driving adoption and engagement.
In other words, DeFi has the opportunity to offer better, faster, cheaper and more secure financial services.
Challenges and Historical Concerns
DeFi, however, is not without its challenges. High transaction fees, particularly on the Ethereum network, and the complexity of using DeFi platforms can be barriers for newcomers. Moreover, high-profile failures like Terra Luna and Celsius have highlighted stability and reliability issues within DeFi projects.
Despite these challenges, DeFi's benefits—improved accessibility, reduced costs, and enhanced security—make it a compelling alternative to traditional finance. However, those who are inclined to delegate custody and seek simplicity and regulatory protection might still prefer CeFi for certain needs (for now).
Complexity is a leading blocker to mass DeFi adoption along with lack of awareness/education. Many potential uses find the fragmented DeFi ecosystem difficult to navigate and fail to understand the value (and risks) of self-custody. We need greater awareness and even greater products.
Building the Infrastructure for the Future of Finance
The benefits of DeFi are clear, the use case exists and the potential for growth is obvious. Some awareness comes with intentional knowledge seeking/transfer, but most of it comes from practice. The average user must start dipping their toe in so that DeFi can expand and grow as centralized exchanges have. Users need apps and tools that enable them to harness the benefits of DeFi without being overwhelmed or discouraged by its complexity.
Individual apps/projects have done a decent job at this on the app level or protocol level. What DeFi needs is an access and experience layer that abstracts away underlying complexities and presents the user with a cohesive and simplified user experience.
Our vision is to create an user-centric gateway to grant an easy-to use access point for any kind of DeFi user. Similar to the internet, people won’t care in the future on which protocol or infrastructure layer they are interacting and to which corresponding decentralized application. They are striving for a seamless and fast way to interact to achieve their goals. The entry hurdle for new DeFi users is very high, burdened by the need for technical knowledge and handling of multiple components at once. New users should not have to learn how to access multiple Layer1 and Layer2 solutions, connecting different wallets with certain dApps, DEXes or bridges. They should rather have access to a fair, code-secured, globally inclusive and disintermediated financial system to achieve their financial and lifestyle goals - whomever, whenever, wherever.
redefined handles the complexity of the current DeFi ecosystem by orchestrating and abstracting all relevant components in the background, forged into an intuitive user interface. You should not need training to leverage the overwhelming possibilities of this next iteration of the financial system - you just lean back and enjoy the benefits of it.
As such, effective DeFi platforms should focus on building cohesive and user-friendly experiences that mitigate risk and enhance accessibility. The transition to DeFi isn't just about adopting new technologies; it's about building robust infrastructure that supports and enhances these innovations.
Closing Thoughts
DeFi represents the future of finance. Its transparency, lower costs, and increased accessibility offer a real alternative to traditional financial systems. Financial meltdowns and centralized exchange issues have accelerated the need for direct custody and disintermediation. We will soon see a world where a DeFi portfolio becomes a recommended investment allocation for both institutions and retail. For that, we need to keep building the tools that leverage the full power of DeFi.