What the Most Recent Crypto Bull Run Means for DeFi
As crypto's popularity continues to surge, the opportunities are endless.
From a late December pickup to the end of the rally in mid-April, Bitcoin sprung up by over 230%. And then with one announcement, it was all gone.
"Damn it, Elon," was all crypto traders could muster after Tesla's chief decided to stop accepting Bitcoin to pay for Tesla products, claiming Bitcoin's adverse environmental impact influenced his decision. Many suspected he had manipulated the market in order to buy more at a lower price, citing that there is no way he could have been oblivious to its carbon footprint. Regardless of his intentions, the market dropped 40%, and traders were left holding the bag.
Despite the hardships of staring at candlestick charts with awe, pounding fists on a desk in frustration and screaming about Elon to no avail, the most recent halt of the crypto bull run can raise some interesting points of discussion inside the decentralized finance (DeFi) community — mainly for developers.
No longer a small-fish game
During the early years of cryptocurrency's existence, few had much of an idea what these new digital assets were or how much potential they had. To the average Wall Street broker, Bitcoin, the first and currently leading cryptocurrency, might as well have been a penny stock or type of trading card in terms of its value and utility — even during the approach up to the 2018 market crash, when Bitcoin first got its notoriety.
During this famous ascension and post-collapse, crypto started to enter the public consciousness and entrench itself in the hearts of the dark web and Reddit. Decentralized financial applications began to become a "thing" and blossom. At this point, the vast majority of crypto users were retail users, but that all changed with the onset of Covid-19, when cryptocurrencies showed their potential.
As CoinDesk reported in early January, the second notable bull of cryptocurrencies hinged on the embrace of large institutional investors, who became the key to its acceptance and steep rise. Now, the big fish are here to stay, and it's a new game. With household names like Andreessen Horowitz, Michael Novogratz and Bain Capital Ventures joining the fold, developers need to think of their product differently— one that is far more suitable for the influx of sophisticated investors, looking for more serious opportunities within DeFi.
Technical readiness for the next boom
Satoshi Nakamoto, the pseudonym of the anonymous creator behind Bitcoin, designed the blockchain that the coin operates on with certain failsafes in mind. He or she didn't have an entire R&D team at the ready to think through the potential problems down the road when his or her vision for wide adoption would take hold. What might happen when more and more people want a piece of the action?
Bitcoin blockchain currently processes only five transactions per second. By comparison, VISA transacts 1,700 transactions per second. The gap is enormous.
Since its inception, a number of competitors have jumped onto the scene, such as current blockchain network leader Ethereum, EOS, leading crypto exchange Binance's Smart Chain, Polkadot and Cardano— named after Renaissance mathematician Gerolamo Cardano. Despite all the new players, and their exotic network names, most seem unlikely to scale to the level of VISA.
Ethereum is the most popular of development platforms, but is frequently critiqued for cripplingly high transaction fees and slow transactions speeds of 10-15 per second. The platform announced several changes coming in summer 2021, but doubts remain over whether these changes will be ready on time. EOS, in contrast, claims to process 4,000 per second, but struggles to overcome negative sentiments within the developer community. Binance is still in its infancy, but could pose an interesting use case and compete with Ethereum and the world's most popular cryptocurrency network, but only time will tell.
As it stands, thousands of projects offer unique trading opportunities akin to what can be found in central markets, such as margin trading, interest savings, exchanges and more. While these projects are impressive in how they're democratizing finance, they need to consider the new pool of users — both institutional and retail, who will require liquidity. Part of the problem inside networks is siloed liquidity, which is limited by infrastructural shortcomings, wherein networks like Ethereum and Polkadot remain largely disconnected from each other.
Companies and projects like ThorChain or LiquidApps are aiming to change the existing paradigm by building bridges between these siloed networks and promoting what they call "liquidity mining." So far, LiquidApps, for example, has managed to bridge the gap between a struggling network in EOS and powerhouse blockchain network Ethereum. But despite ongoing efforts and some community optimism, the broader DeFi ecosystem still remains fragmented. It will take more entrepreneurs following in their footsteps to change that.
Given the current limitations, developers and network operators will need to prepare for a much bigger fish. Institutional investors and fund managers stepping into the arena will expect infrastructure that is equipped to handle larger volumes and the necessary liquidity. More importantly, mainstream retail investors will want a piece of the action and will ultimately need to be addressed too.
From the eyes of the user
Business empires like Google and Amazon built products that were not only in demand, but also user intuitive. But it's not easy to say the same of most DeFi projects, whose developers often suffer from being locked into their own perspective rather than the end user's. In comparison to mainstream user interfaces of big companies like Walmart and Google, whose UX is designed always with the user in mind, DeFi projects are falling way short of the mark.
Moreover, a survey from Cardify showed only 16% of crypto investors fully understand cryptocurrency and the potential behind it, which suggests that educational initiatives are lagging behind. But part of it stems from the accessibility problems of DeFi projects, whose interfaces are difficult to navigate and are generally unintuitive — let alone educational in any way.
The problem first stems from the perception of the user. Many developers likely suffer from tunnel vision when conceiving their project, viewing it from their perspective with the underlying assumption that the user is someone similar to them. In fact, as crypto becomes increasingly adopted, the percentage of novice users using DeFi will rise.
The same can be said of institutional investors who will also need to be taken into consideration; they will look for DeFi applications that can be tailored to service their more sophisticated needs. Ultimately, the success of DeFi applications will hinge on the developer's ability to realize this new audience and its importance.
For now, DeFi might be a fortress of self-serving crypto ideologues and merry Redditors day trading, but when the new crowds come shuffling in, DeFi developers will need to be ready. Now is the time for them to reflect on changing for the better.
Entrepreneur Leadership Network Contributor