Cryptocurrencies and distributed-ledger-technologies (DLT) have enjoyed a stellar year in 2020, with enterprise and institutional adoption of the technologies reaching unprecedented levels.
Decentralized finance (DeFi) is the latest DLT use-case to explode into life in the sector, with over $14 billion worth of assets locked into DeFi applications and token prices spiking.
However, most participants still continue to be defined by their technical skill and deep experience in the space. For DeFi’s full potential to be unlocked it needs mainstream investment and engagement, which means challenging some of the norms that have developed in the space.
Kicking the DeFi tires
Making the case for retail investment in DeFi is easier than other more speculative assets because there is inherent functionality built into the technology. Many of us within the industry can describe exciting applications of the technology to market-related use cases, from lending and borrowing to the creation of digital currencies.
But too often we see bottlenecks emerge when we try to show these use cases rather than tell, and find infrastructure that still works on the assumption that users will be hobbyists and technical experts.
This leaves us in a bind, as many of the vaunted use cases will only work when critical mass of users and investors are involved, yet theoretical use cases are not enough to get non-technical users on board. To bridge this gap, we need to review the underlying technology from first principles. This means spending less time thinking about the abstraction and decentralization of processes, and more time considering what it would take to get our friends and family who are dentists, teachers, or builders active in the space.
The crypto ecosystem has largely been built by early adopters and those with an ideological drive. While this has led to mind-boggling feats of mathematics and engineering, it has also created a culture and community that can sometimes seem insulated.
Early progress focused on technological innovation, creating a system with enormous potential. Functions like marketing, design, user experience and customer support did not receive the same attention, rendering much of the DeFi space opaque for retail investors. As we move to the next phase in the sector, this latest injection of capital and interest provides an ideal opportunity to build a sustainable, retail-focused ecosystem.
Features and functionality
DeFi is currently where radio was at the end of the 19th century. Talented and intelligent people are making intellectual breakthroughs, but the next level of innovation will come from the input and creativity of non-technical users.
The invention of the vacuum tube opened radio up to the masses, creating value ranging from the founding of CBS to the creation of student and pirate radio stations. Opening up innovation in DeFi will be a more gradual process that will require consumerization of the technology through software. In practice, this means abstracting away the technical backend and improving the front-end user experience.
The best starting point for doing this is through APIs—shorthand for “application programming interfaces” and the technical term for what users see and interact with when engaging with an app. Here it is important not to let the perfect be the enemy of the good. Given decentralization is baked into DeFi, APIs should simplify broad engagement by offering a common way to extract transaction data from many different blockchain protocols.
Users want clear and straightforward use cases, and APIs are the most effective layer on which to deliver this. We know from other sectors of technology how APIs can abstract away technical details and allow users to apply their thinking on a higher level, so rather than reinventing the wheel we should focus on improving these and making them accessible.
Improving APIs should also pave the way for broader uses of analytics. Accessible analytics that can be applied across different protocols opens up the market and allows experts in traditional finance and modeling to add value without the need to pair this with technical knowledge. This step would unlock a great deal of talent that could in turn enhance the DeFi ecosystem, attracting more retail investors, to the benefit of all.
Another way to remove the technical burden for retail users is to use software-as-a-service (SaaS) tools to simplify the experience. This allows developers to scale their networks up and down more easily, improving agility and flexibility in a sector that can be volatile and subject to swings in usage.
Improving accessibility in this way increases the amount of innovation in the space, diverting resources to neglected functions in marketing and design that will ultimately trigger the consumer breakthrough.
Excited activity in the DeFi space is not necessarily in the long-term interest of participants, but it can act as a catalyst for improvement and reform.
However, this activity needs to be handled quickly and effectively at the infrastructure layer to be a success. “Come for the volatility, stay for the use cases” is not the most inspiring of pitches, and so it is incumbent on the entire community to promote and describe DeFi as a framework that enables functionality above all.
Doing this will attract retail investors, flattening the ownership curve and reducing volatility, which will in turn create a virtuous cycle that attracts greater uptake. Bridging this gap can be seen as a duty to the technology or a sound commercial decision, but either way it is a massive opportunity.