Decentralized finance technology has been around for a while, but has still failed to attract the mainstream audience, notes investor Santiago Santos. “Ten years have passed and we have ten users in DeFi,” he jokes.
In today’s “we’re still so early” crypto industry, the self-deprecating “ten users” joke remains true. DeFi’s relatively paltry numbers hardly resemble what most would consider the “mass adoption” phenomenon promised years ago.
The timing of the DeFi movement is a bit out of sync, says Blockchain Capital general partner Aleks Larsen, because the technology was born in an environment where the infrastructure wasn’t ready for mainstream use.
On the Empire podcast (Spotify/Apple), Larsen explains that the Ethereum network – the overloaded backbone of early DeFi innovations – “got bloated very quickly. Transaction costs skyrocketed,” he says.
But he emphasizes that the DeFi thesis is “powerful” at its core.
“These are huge markets that DeFi is after,” Larsen notes. “That’s one of the most exciting things about crypto,” he says. “You would expect that a new technology might initially go for niche use, but crypto is going straight for the juggernauts.”
“Global permissionless financial services,” Larsen continues, “at a very fundamental level are better suited to serve the internet economy and will grow with it.”
You are not a daily active user of a mortgage
The mass adoption of DeFi won’t necessarily look like what many imagine, Larsen says: “You’re not a daily active user of a mortgage.”
Larsen says DeFi metrics will never resemble a game’s crazy activity volume, for example, because of the technology’s unique purpose. “But the amount of capital that the system has amassed, I would say, is quite impressive.”
The retail sector drove volume in the early days of DeFi, Larsen explains, but was trapped in an “unsustainable transaction fee environment” that “put a damper on adoption” just as broader attention turned to the emerging technology.
The Web3 infrastructure simply wasn’t ready for DeFi when it first hit the market, but “we’re getting there now,” he says. “We will have an infrastructure that is high performance, that is cheap to run and that is safe. And we have seen a lot of progress in that area.”
The next generation of DeFi users
Larsen says the industry is now waiting for the “next group of users,” which likely won’t be retail in nature. The “power users” of financial services tend to be institutional, he says.
“When you think about the next step of innovation in DeFi, derivatives come to mind. And these aren’t really retail products. These are products for advanced users of financial instruments.”
Larsen says the movement is “resulting in tokenized markets,” with emerging developments from massive entities like BlackRock looking to “enter the space.” He adds that he “wouldn’t be surprised if they did something big in the coming months.”
“Until then,” he concludes, “the main potential users here remain crypto degens and DAO treasuries, and perhaps forward-looking neobanks as well.”