While headlines from the blockchain industry have recently been dominated by Bitcoin, the biggest story in the space has still largely been overlooked (or missed) by most news outlets: the rise of DeFi, or Decentralized Finance. Over the last year, a “decentralized Wall Street” has emerged, with users locking up over $50 billion worth of assets into applications that are replicating traditional financial products on decentralized blockchain infrastructure.
With DeFi, millions of new users are now lending, borrowing, trading, saving, and more, all without the permission of companies whose interests may not always align with their customers. As the DeFi sector continues to grow both in terms of users and total value locked, those in the know are all wondering: how will the rise of DeFi impact the fintech industry?
From Disruptors to Late Movers
Fintech companies have long been thought of as the most innovative part of the finance industry, with their sleek apps and easy-to-use user interfaces posing a significant challenge to the legacy banking experience. However, when it comes to the blockchain industry, these innovative companies and their apps have struggled to keep up; with the rise of DeFi, they are playing catch-up. After years of treating the blockchain space as something ignorable, these increasingly powerful startups were largely caught off-guard by crypto’s resurgence, with most not meaningfully engaging with Bitcoin until early this year in 2021.
Even today, many of these companies are still scrambling to incorporate barebones custodian solutions to their users to simply hold their digital assets. However, custody is just the bare minimum. The fintech teams who are treating today's interest in digital assets as a passing fad are missing the bigger picture: this is the Internet coming for their business. They should be working to adapt to this new technology just as their surviving predecessors did 20 years ago with the rise of web 2.0.
Misunderstanding User Appetite
The skepticism around DeFi is born out of a misunderstanding of how attractive this technology is to normal users. Fintechs believe they can outmaneuver banks by offering better user experiences and giving users increased control over their finances. They also typically throw in some yield or profit earning opportunities, a low bar to overcome given bank savings accounts are offering 0.02% APY. However, what fintechs haven’t realized yet is that their new competitor is not legacy banking; it is DeFi’s bankless experience, which gives users the control and opportunity they thought they had when using a fintech app.
DeFi users can maintain absolute control over their assets, while at the same time gaining access to financial products and platforms that have significant advantages over their legacy counterparts. Whether it's making a trade on a decentralized exchange, storing assets using private keys, lending money through a shared liquidity pool and earning unparalleled yield, or buying tokens that track the price of real-world assets like gold, DeFi users are making financial decisions entirely at their own discretion. There is no Robinhood that can halt your transaction when the rules of the game are suddenly in your favor. The outrage we’re seeing these days with fintech and banking experiences are the result of a growing realization that people do not have the control they thought they had over their financial lives. As trust issues continue to occur in the traditional financial world and opportunities for yield stagnate, the exodus into DeFi will only continue.
Becoming DeFi-Ready
In the face of this growing movement, fintechs should begin asking themselves how and why users want decentralized financial products. For example, DeFi users that are lending their money on Aave, the largest decentralized lending protocol, are earning between 7% to 14% APY depending on the day. As a fintech, you should know that the reason your users aren’t moving onto Aave is not because your neo-banking app has such a wonderful user experience or because they’re satisfied with the 0.50% APY high yield savings account you’re offering them. It is because they don’t know how to get onto Aave.
DeFi is still a nascent space with various risks, particularly around sudden volume shifts and market manipulation with the steady influx of liquidity. As a result, developers have prioritized building powerful protocols with resilient infrastructure rather than optimizing the user experience. While millions of people are now using DeFi and are comfortable controlling their own wallets and interacting directly with smart contracts, they’re still a small minority. In terms of user experience, fintechs are unlikely to lose their lead anytime soon, and so the best way they can preserve and even grow their user bases is by providing native access to DeFi protocols in ways that abstract away any significant barriers to entry. Rather than ignoring DeFi, or trying to build their own versions of DeFi products, the most forward-looking teams are likely already thinking of ways to integrate with these new applications.
The Race is Already On
However, just deciding to offer access to DeFi is the easy part. The difficult part for these companies will be figuring out how to become DeFi-ready when the landscape is changing so quickly. In DeFi, users can hop in and out protocols rapidly, and the app that's incredibly popular today might not be next month as users jump ship in favor of newer opportunities. Furthermore, Ethereum developers are already in short supply, and once companies decide all at once to become DeFi-enabled, that’s when the real scramble for talent will begin.
The problem could compound further as users demand access to apps on other blockchains, requiring entirely different integration teams. If fintechs are serious about engaging with this new space, they should develop a future-proof approach to becoming DeFi-ready and, as Gartner argues, explore middleware solutions, like oracles, that enable their systems to integrate with multiple blockchains at once rather than hiring developers for target chains. What ultimately matters most for strategic planning is that time is of the essence. Fintechs can either act now to become useful guides for their users as they enter the world of DeFi, or they can find themselves straggling behind their competitors as the transition to more decentralized and attractive financial products continues en masse.
This article originally appeared on Nasdaq.
