How does DeFi go 100x?
There are two basic approaches. One is to focus on banking “crypto native” activity. This means that NFTs, crypto gaming (”GameFi”), web3 social, and other uniquely-web3 innovations could all be DeFi’s savior.
The idea is that as these markets grow, they will need financial services. DeFi is primed to capture 100% of that growth. The problem? Even if these activities 10x from their current states, it still puts a low ceiling on DeFi’s growth.
The other approach is to go non crypto-native. Specifically, DeFi should go after boring, everyday economic activity — sectors such as payments, lending, e-commerce, salaries, or savings.
That’s right, be boring! When you look at the numbers, this is actually DeFi’s only viable path to 100x growth. And like all major disruptive technologies from the past, DeFi must do so by solving the same old problems in a better way.
If You’re Gonna Hunt Ducks, Go Where the Ducks Are!
It doesn’t get much more massive than the everyday economy. Global e-commerce revenue is around $2.27T, and U.S. markets issued $1.3T of debt last year. The U.S. also made around $8T of salary payments in 2021. And the global debt market is estimated at a staggering $123.5T. Compare that to NFTs ($3.9B of creator revenue) or even the entire video game market (around $180B of global revenue) and it becomes clear that these sectors, currently being targeted by crypto-native innovations won’t move the needle enough for 100x growth. The only thing that will is the everyday economy.
History Points the Way
Stealing market share from the “old way” is exactly how the internet, the car, the phone, and the telegraph transformed society. In fact, if DeFi can’t steal marketshare from TradFi, then I believe it will, like 3D printing, be regarded in the long term as a niche product that never really lived up to the hype.
There are numerous examples illustrating how fundamental transformation stems from taking over boring old markets. As shown in the graphic below, the internet has just steadily eaten up traditional commerce over the last two decades. We see the results of this every day: people literally do not go to stores as much.
The internet also stole ad revenue from older mediums, including print newspapers, radio, and, to some extent, TV. In 2021, Google, Meta, and Amazon alone accounted for 47% of all money spent on advertising. Digital ad spending continues to grow, while spending on print newspapers and magazines will fall nearly 20% this year.
Cars provide another example. Joel Tarr, a professor at Carnegie Mellon who studies the history of American cities, wrote about this back in the 1970’s. He noted that at the start of the 1900’s, there were 3M horses inside cities themselves. Now, of course, there’s close to zero. Building entirely new use cases is cool, but it tends to come later in the growth cycle. They are “second order effects.”
They become possible because people are already using the technology, when builders can start assuming that most people have and/or understand the new technology. Suburbs only work when everyone has cars. Uber only works when everyone has smart phones. But first, if a technology is to become mainstream, it has no choice but to solve an old, existing problem, better than it has been solved before.
Stable User-Needs Provide a Clear North Star
Speaking of old existing problems, there’s a quote from Jeff Bezos where he says (I’m heavily paraphrasing), “I’m often asked what will change over the next 10 years. But the more interesting question is what won’t change. Because you can build a business strategy around what’s stable in time.”
Finance is one of those areas where the user’s needs really don’t change. People want higher yields, more liquidity, more investment opportunities, faster settlement, and generally more flexibility with their money. These are timeless and universal. DeFi can do better on every single one.
Paid the Same Day
By cutting out intermediaries and automating money movements, DeFi can offer checking accounts with 10x higher average interest rates than TradFi institutions. It can allow hourly and gig workers to be paid same-day via smart contracts (in fact, these pilots are already happening).
Or, like we’re building at Goldfinch, crypto can easily get capital anywhere in the world and enable direct borrower/lender relationships, meaning businesses in countries with historically low access to capital can tap into huge pools of capital — all more quickly and efficiently than has been possible before.
And once that debt is on chain, it can be priced more accurately with public visibility to previous sales and the historical cashflows of that position. Combined with interoperability and permissionless trading venues, you get more liquidity which reduces the cost of capital.
It’s Time to Shift the Mindset
When you envision the future of DeFi, what do you see? A new financial system, or a narrow lens of emerging use cases? I believe we are standing at a pivotal moment for the future of DeFi, a time of tremendous change that requires us to step up and build things with real, lasting power, that have the ability to transform society by providing essential services to participants, solving perennial problems.
This means that, as an industry, in order to continue to grow and move forward, we must shift our mindset. We can start by developing an allergic reaction to business models that are complex, self-referential, don’t have clear use cases, or that require a high token price to function. During the bull market, when everything is working, it’s hard to make a case for clear, boring utility.
And why rock the boat when everyone is making money? But a true bear market is a natural time to reassess and get back to fundamentals.
Clear use case, real utility, real value. It’s boring, but it works. If we all want DeFi to achieve society-transforming levels of growth, then we must follow this familiar path of fundamental, boring, useful innovation.
We already have the best, most innovative technology, and the world’s brightest people working on building new tools. Let’s aim high. We can do it.