How DeFi will innovate our financial ecosystems (part 1/7)

…and what to do about it…

[This is a cross-post. I first published this article on publish0x — always trying out something new]

A lot of people talk and write about cryptocurrencies these days. You’ve certainly read headlines like:

“Bitcoin reaches a new all-time high”

“DeFi crosses 15b$ TVL (total value locked) — and rising”

“>12% APY on the newest DeFi project”

Yet, most of these articles seem to miss the profound change that’s currently happening to the financial ecosystem as a whole. I’ll use my “lockdown XMas holidays” (December 2020) to take you on a trip: Instead of skiing in the Austrian alps (what I usually prefer to do this time of year), we’ll dive into my thoughts about recent developments in cryptocurrencies, DeFi and tokenization. We will ponder about their potential influence on traditional (and future) financial markets. We’ ll have a look into the risks, but — maybe more important — into the opportunities for new and established players in these markets.

Yes, there are opportunities. Here. Now. But it will take a lot of courage to seize them.

So, please: Get some cookies, take a seat and make yourself comfortable…

A promise: I’ll try to keep it entertaining and understandable — especially for those of you who haven’t gone “down the rabbit whole of crypto” yet.

Part 1: The macro level

Let’s first take the eagle eye perspective and analyze the recent developments. If we start from a naive point of view, we certainly notice that something is going on with the core money system we used to know. While many of us still value the attributes of fiat money like e.g. its privacy advantages when used as cash, digitization doesn’t stop here.

Digitization will change our money system fundamentally — and we all know it.

FinTechs attack from the UX layer

The established money systems and the traditional players in these markets have been getting under pressure for years— especially regarding the user experience layer (UX) around the use case of spending money. Commodity rules. If you look at the growth of PayPal, Apple Pay or neo banks (like N26 here in Germany) — just to name a few from my own European perspective. Developments in Asia with Alipay and WeChat-Pay are even further ahead. Most of these current FinTech innovations are sitting on top of the established financial market — luring users away and making them more dependent (locking them in) on their own respective platforms.

While this in itself might be very dangerous for established players in the financial markets, they still benefit from (national) regulations. Banking licenses offer at least some protection from overwhelming innovation pressure. So, there is still some “air to breathe” if banks are open and partner with these new players — staying at least somewhat relevant for the time being. Yet, there is not time to relax, because there is more trouble around.

DeFi attacks from the left

Cryptocurrencies and Decentralized Finance (DeFi) projects are a completely different kinds of “beast” when it comes to competition. The following aspects make them very dangerous for the existing banking ecosystem:
1) The DeFi ecosystem players don’t only attack traditional finance on the UX layer, they rather reinvent the complete system with their decentralized, blockchain-native architecture. Their composable money-lego approach makes them even more effective than single competitors. The usage of standardized tokens glues them together and enables unprecedented interoperability. Each project innovates on a different aspect. One project on its own isn’t dangerous — their collection is.
2) The first generation of cryptocurrencies had obvious limitations in scalability and UX — things banks are currently deeply caring about in their fight against FinTech competition. That’s why these new DeFi players (superficially building on the same limitations and awkward crypto wallets) aren’t taken for serious. A big mistake — as we will learn soon.
3) First-generation cryptocurrencies like Bitcoin obviously didn’t replace or even challenge our existing money system as they boldly promised ( — at least not yet). But the innovation didn’t stop there: The DeFi ecosystem established well-trusted stable coins pegged to fiat currencies most of them running on top of the “plug & play” Ethereum blockchain. Several DeFi projects now offer benefits like interest-bearing accounts that simply aren’t available anymore in traditional finance.
4) Many of these DeFi projects feel so “sci-fi” and deliberately “retro” that they are easily underestimated from a traditional banker’s point of view. Or what do you think about Curve Finance’s UI (see below)? At the time of writing, users put roughly 900M$ into this application alone to accrue value. We’ll work on that in a later part…

Commercial currencies and CBDCs attack from the right

As if this wasn’t enough, we shouldn’t forget about Big Tech launching their own commercial currencies (e.g. Facebook’s Libra/Diem) and governments Central Bank Digital Currencies (like China’s) and their response to to the rise of crypto. Commercial currencies and Central Bank Digital Currencies (CBDCs) are additional innovations that will certainly influence (if not even disrupt) the financial market heavily. This poses interesting questions — not only for retail and commercial banks but also those western Central Banks (like FED and ECB) who are obviously late in the game. Even they can learn from Ethereum and DeFi. If money-supply is your main use case — that problem has been solved. We will get there in a later part.

But: Not all hope is lost

This all might sound rather devastating for existing players in these markets. But it’s not — if you are ready to move fast and embrace these changes rather than fight against them or re-invent the wheel. Many people talk about Bitcoin, blockchains or distributed ledgers. They put a lot of energy into creating their own “permissioned chains” — instead of innovating on top of the existing public chains. I’m afraid blockchains are just the foundational technology. We should treat them as a fast innovating public good. Crucial innovation rather happens on top of them: on the token layer.

We can even see that in the Blockchain world itself: Token “bridges” are the new hype: Bringing Bitcoin to Ethereum via tBTC, renBTC or WBTC to unlock its DeFi landscape for Bitcoin holders or vice versa like Sovryn is trying. Linking promising new chains like Cosmos or Polkadot to Ethereum. At the moment, insiders discuss heavily about the technology to accomplish that. But these discussions will go away soon. Tokens will “flow around”. They will be the new base components, the “glue” everybody is taking for granted.

Tokens unleashed DeFi.
They will very soon open incredible new use cases.
For insurance.
For real estate.
For fashion.
For gaming.
For art.

New and existing players in the financial sectors have to prepare for these changes. They will come outside-in. The infrastructure is already built — in the public. It’s about time to embrace it!


That’s it for now. Are you already curious? Great.

In the meantime, I’ve published subsequent parts for this series:


Disclaimer: This article is not intended to be an investment advice of any sort. Do your own research and search for professional support if you intend to invest in one of the projects mentioned in this article.

You are also welcome to follow me on Twitter or get in touch via LinkedIn (but please tell me your reason to connect and how you found me).

Working at the intersection of New Work and New Tech. IoT veteran. Blockchain enthusiast. Driving @zuehlke_group to the next level.