Jamie Burke is the author of the article and an early investor in Bitcoin and Ethereum. In 2013, Jamie established Outlier Ventures, the first venture fund and platform in Europe dedicated to blockchain and Web 3. Since then, Outlier Ventures has built a portfolio that includes industry-defined projects such as Brave Browser, Fetch.ai, Ocean Protocol, DIA Data, Enigma/Secret Network, and has developed an award-winning Web 3 accelerator every year Cooperated with 30 pre-seed startup companies and has helped them raise more than 130 million US dollars in growth funds.
1. Define “Institution DeFi”
A. Local encryption enterprise
For institutions/enterprises that have entered the crypto field, their assets are exposed in the market, but in the traditional sense it is “Underbanked (people or companies with insufficient bank deposits cannot obtain mainstream financial services usually provided by retail banks)”. Due to the particularity of the crypto industry, they are excluded from traditional banking and financial services, such as loans/borrowing, but navigate a challenging cryptocurrency world.
For example, DApp startups, middleware service providers, crypto traders, venture capital companies, or foundations.
B. Financial company
For traders and senior professional investors of medium and large financial institutions, they seem to have little interest in “crypto” as an alternative asset class, especially its “DeFi”, but indirectly invest through custody, derivatives and ETFs.
For example, professional traders, family offices, hedge funds, banks, pension funds, etc.
C. Fintech company
Proven DeFi financial products can easily enter the financial technology, bringing a B2B2C method to meet the needs of new retail through standardized online and offline. Given that most fintech companies are losing money, the various products and profitability demonstrated by DeFi (although the current ratio of stable companies has dropped from the current 7-10%) will not only be profitable, but also Further acquire new users.
For example, financial technology startups like Square.
D. Small businesses with insufficient bank deposits
There is a view that in the first, second and third world economies, due to their own special reasons, companies with insufficient bank funds, especially those single traders/SMEs that cannot obtain affordable debt, may appear in In the DeFi market. For example, individual businesses, SMEs, entrepreneurs, gambling/adult industries.
2. The order of institutions using DeFi
All the above-mentioned stakeholders operate within a scope. Within this scope, DeFi is more likely to be accepted by local cryptocurrencies and traders in the next ten years, followed by small and medium-sized enterprises with insufficient bank funds, and finally large financial institutions. . It can be said that 95% of institutions that have contacted or used encryption technology directly, they did not use DeFi.
How strong the encryption ability of a particular stakeholder group is, or how low the level of service the existing financial system is for them, leads to risk appetite or despair, which will promote the wider application of DeFi. But this also involves technical proficiency, the DeFi industry’s ability to lower the threshold, and the typical transaction scale and quantity capabilities required by processing institutions and their counterparties.
Obviously, the current scale of DeFi and cryptocurrency is too small for most financial institutions, and they don’t even bother to understand, let alone deploy IT systems. Even if you upgrade your understanding, the market is too weak to invest a lot of money. In other words, the adoption of DeFi’s encryption technology that exceeds 5% of today must start somewhere. In one of the most innovative and fast-paced areas of financial technology, there is obviously a strong economic motivation to solve its problems. The important thing is that you can’t underestimate the power of DeFi’s combination. This means that no one entity alone can solve all these problems, but each problem can be solved by a professional agreement. These agreements can be quickly combined into a stack. Create a strong open financial system.
3. Innovative detonator
The following are several DeFi innovative detonators, which are expected to launch a new round of DeFi 2.0 after application.
Every hype cycle is usually the result of various innovations. In the context of DeFi 2.0, the innovations that promote the DeFi needs of institutions are as follows:
NFT; confidentiality solutions; decentralized identities (DIDs) and verifiable certificates; autonomous economic agents (AEAs);
(1) Non-homogeneous tokens (NFT)
The basic concepts and future development prospects of NFT will not be repeated here. As mentioned in the previous article, why NFT will take over Defi.
Mars Exclusive | Valuation scarce NFT is a zero-sum game? Understand the reason why NFT took over DeFi
At the end of September, liquidity mining seemed to have reached a bottleneck period. Some investors with keen sense of smell have set their sights on the NFT field. More and more people believe that NFT will usher in an explosive development. Many users have begun to understand and invest in the NFT field.
The most important problem is that NFT is a highly abstract concept, and it cannot exist independently of the blockchain. Therefore, the commercial landing process of NFT is actually the commercial landing process of blockchain. Most of the time, the problems faced by blockchain implementation are not technical, but cognitive and regulatory.
(2) Confidentiality solutions: private data, transactions and calculations
So far, the DeFi protocol has been open, just like the established public and unlicensed platforms, all transactions and balances are visible and traceable to the public. Since this part was purely necessary, there was no technology that could be used for on-chain secrecy.
However, there are now several tools that can be used for confidential transactions, some are already online on the mainnet, and others are quickly following up. On-chain confidentiality will remove another barrier for institutional participants, allowing them to participate when there is a commercial requirement for privacy.
a. Privacy
Various forms of privacy primitives such as zero-knowledge proofs (ZKPs) have changed from theory to practical applications on and off the chain, and have been deployed in DeFi. EY Nightfall Enterprise enables standard homogenized and non-homogeneous tokens to be traded on the Ethereum blockchain with complete privacy. The driving force for privacy and expansion accelerates the innovation of the encryption industry, which also makes a difference Type ZKP technology. ZKP is now looking for ways to enter the DeFi project, such as the Loopring protocol or indirectly through the use of zkRollups extension solutions.
b. Mixed transaction
Transaction mixing techniques can be used to obscure the history of specific tokens.
c. L2 expansion plan
The design of the L2 expansion scheme has higher privacy than the L1 network. It is worth noting that Aztec recently released their v2 testnet, which enables private transactions. The cost of GAS is significantly lower than ordinary transactions, and it is compatible with the current Ethereum mainnet.
d. General encryption calculation
In addition to encrypting some data, the new encrypted network can also realize the confidentiality of all data on the chain through the built-in privacy function. The Secret Network (The Secret Network) now has a general encryption calculation on its mainnet, called “secret contract”, and the Oasis network will soon launch its mainnet, whose core is the privacy function.
(3) Decentralized IDs (DIDs) and verifiable certificates
DIDs are a new type of identifier that can realize verifiable and decentralized digital identities. DID can be decoupled from centralized registration centers, identity providers, and certification authorities. This design enables the DID controller to prove its control without obtaining permission from any other party, and is a standard introduced by W3C (World Wide Web Foundation).
DID can be said to be an unpopular direction in the blockchain field. At present, there are only a few teams researching DID, and there are not many projects developed, and there are few research reports on the DID industry. The popularity of DID is incomparable with popular concepts such as expansion, cross-chain, and DeFi. But in fact, it seems to have a lot of value. Microsoft’s layout of DID may illustrate this from the side.
When combined with DID, verifiable credentials can exchange information, verify the origin and integrity of the information, that is, the information can be traced back to the issuer (through their DID), and verify whether it has changed (that is, the private key that proves the DID) sign).
(4) Autonomous Economic Agents (AEAs)
In the context of blockchain, it can be considered that AEA will increase its complexity on top of DeFi’s smart contract logic and execution layer.
In the same way, ERC-20 and smart contracts can synthesize a DeFi protocol stack and interact on top of Ethereum to form a “currency Lego”, and AEA can be regarded as an “AI Lego”. Here, the L2 technology supplement has upgraded the Ethereum L1 protocol, which is reflected in:
a) Simplify user experience through automation;
b) Support modularization, complex decision-making and repeated use of off-chain machine learning capabilities (optional on-chain components);
c) Proactively promote autonomy (smart contracts passively accept TX input/contract calls).
In DeFi, in addition to all on-chain smart contract logic, the requirements for complex off-chain logic are also getting higher and higher. Usually, oracles are used to actively “do things” in response to external events on the blockchain. If there is no similarly open and accessible external chain “Lego”, according to the existing on-chain form of smart contracts, we may see DeFi becoming more and more like CeFi. For example, Fetch.ai is a leading project dedicated to cross-blockchain AEAs, and they have published multiple papers on the promise of their technology.
4. Advantages and limitations of DeFi
DeFi is both transformative and limited. I once described DeFi as a radical “super-competitive” game. Its distributed participant system seeks a balance between profit and efficiency, which is in direct contrast with the existing financial system. In a very changeable market environment, remove inefficiencies and actively seek profitability.
Obviously, such a new financial system will not only have the possibility of greatly improving efficiency, but also provide new possibilities for an increasingly digital economy.
Similarly, the essence of DeFi’s fast-paced innovation is due to its permissionless and open source nature. Anyone with technical capabilities can launch or fork an unreviewed, unregulated smart contract or agreement globally. As a financial product or service, the product or service (at least in principle) can act independently of its creator to a certain extent.
The question is, it remains to be seen to what extent the regulator will allow this to continue to happen. To what extent can they stop or at least find ways to contain it, rather than actively participating, or more simply: in terms of encouraging innovation, competition and economic expansion, will its net benefits exceed the current system?
Many people will treat DeFi as a marginal case in the same way as Bitcoin or Ethereum, but regulators have gone back to treat both as net benefits and even declared that they are operating “outside their jurisdiction.”
In fact, when talking about DeFi, how do today’s dominant top-down fiat currency systems interact and integrate with bottom-up cryptocurrencies. Will there be bridges to and from their jurisdiction to allow the free flow of capital?
Question: How can DeFi allow new institutional users to benefit from its innovations without becoming too centralized in the process?
