Decentralized vs. Mainstream Financial Services

Comparing the state of programmable money to “mainstream” financial services

  1. The most widely adopted fintech applications include payments and money transfer. Wallets and mobile payments, cards by challenger banks, and online banking are among the most impactful fintech services. We are also seeing an increase in lending. The regions most proactive in fintech adoption are Asia and Europe.

Takeaways on Defi

Insight #1: Activity is highly skewed towards “capital markets”

Defi is re-architecting the stock market. Over the past year, most of the hype came from events such as the COMP (Compound) token explosion and Uniswap’s daily trading volume exceeding Coinbase’s.

USD Locked in Compound. Source: https://cipher.substack.com/p/contextualising-compound
  • Lending protocols: Compound, Aave
  • Aggregators: Yearn.finance, 1inch
  • Exchanges: Matcha, dydx
https://defipulse.com/
Source: https://www.cbinsights.com/research/report/fintech-250-startups-most-promising/
  1. Wealth management: Fintech apps like Personal Capital, Wealthfront and Betterment have garnered enormous success with tools that can automate and manage your budgeting and investing. Within defi, we have portfolio management tools such as Zerion and Instadapp, which also open you up to various investment vehicles and track your portfolio’s performance. What might be missing is a robo-advisor feature. A lot of defi investors are still using spreadsheets to track their returns — which is fair, but not everybody wants to follow their investments obsessively. Some people would rather take the dollar-cost averaging or long-term/passive approach.
  2. Consumer lending (not just for assets): When we think of lending in defi, perhaps the most compelling concept that comes to mind is flash loans. What is still missing is the feasibility (and a user’s willingness) to take out a loan for a longer period of time, for purposes other than trading.
  3. Real estate investing: We have seen some projects that leverage the blockchain to tokenize real estate and farmland. Defi has made it extremely easy to create synthetic assets. We will need to build up the systems and products to convert real assets into their synthetic versions, and track their ownership as well as value over time. We will go deeper into this in insight #2.

Insight #2: New digital assets

Defi has been all about inventing unforeseen asset classes that don’t yet exist (or wouldn’t be possible) in traditional finance. Even beyond asset classes, it has enabled alternative ways to invest, such as prediction markets like Polymarket and Upshot, a Q&A protocol.

Insight #3: The new financial stack

In his article “Fintech Infrastructure 101”, investor Chris McCann illustrated the financial stack behind fintech. This is how the fintech and defi stacks might look next to each other:

Insight #4: Impact of CBDC on acceptance of stablecoins

China has been steadfast about its digital Yuan, which may spawn unprecedented curiosity and acceptance of digital currencies. Even though this may not be specific to defi, it is likely that the “masses” will come to embrace an alternative representation of money. This can facilitate the adoption of assets such as DAI, USDC and their derivatives.

Detailed comparisons by fintech category

In order of market size

Wealth Management ($75T)

Wealth management in defi is mostly about portfolio tracking, rather than helping you manage your income, plan your budget, and choosing how to invest.

  • Retail investing & portfolio management: Robinhood, Personal Capital
  • Personal finance: Digit, Albert, ClarityMoney

Capital Markets ($74T)

In my opinion, this was the most fascinating comparison. Market makers in traditional finance tend to be high-frequency trading firms. For example, Citadel is the largest Designated Market Maker on the NYSE.

  • Market Makers: Citadel Securities, Virtu Financial
  • Market Makers: Uniswap, Curve Finance, Sushiswap, Compound
  • Stable assets: USDC, USDT, ARCx, xDai
  • Derivatives: Erasure, Opium Network, Derivadex
  • Prediction markets: Augur, Flux, Polymarket, Veil

Banking ($9T)

Fintech

  • Corporate: Brex, Mercury, Ramp

Real Estate ($9T)

Fintech

Lending ($7T)

Within the defi money markets, lending is at the center of all the activity. Unlike fintech, lending on defi requires little to no credit scoring or KYC flows. Without these controls, anyone can participate. Risks are offset by overcollateralization, but we will find out whether this system will enable more loans in the “mainstream” sense of the word.

  • Direct lending & underwriting: Affirm, Credit Karma, Earnest
  • Business lending: BlueVine

Insurance ($5T)

Similar to loans, insurance in defi targets the investment use case.

  • Home: Hippo, Lemonade
  • Car: Metromile
  • Life: Ethos

Payments & Money Transfer ($3T)

Effective use case for defi, but relatively untapped for sending and receiving money. The defi twist could allow funds in the wallet also earn interest from the money markets.

  • POS: Square, Toast
  • Personal payments & wallets: Alipay, Transferwise, Grab, Remitly, Paga, Zelle
  • Personal payments: Sablier

Accounting ($106B)

This is mostly for business use cases. This is likely very far out for defi, and TBD if the use case makes sense.

Compliance & Risk Management ($17B)

Fintech

  • Risk: Ayasdi, Robust Intelligence, Sift Science

Data Aggregation ($16B)

The Plaid “connector” use case reminds me of aggregators in defi, though they are not exactly the same. An aggregator like Yearn doesn’t need a one-stop-shop like Plaid to connect to other protocols. However, it isn’t hard to imagine tools that expedite the connection from one app to various protocols.

Financial Infrastructure APIs

These are the companies and projects that provide the rails in a “one stop shop” approach. Not too many in Defi, likely because each protocol offers its SDK or API.

  • Bank Connector API: Plaid
  • Card issuing API: Marqeta, Stripe

Conclusion

It’s exciting to see the infrastructure, incentives and traction behind defi — especially in its capital markets.

https://sushiswapclassic.org/

Engineering at Brex, prev. Apple, MSFT, Brown CS + Econ. More at juliawu.me

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store