Founders and CEOs of some of the fastest-growing DeFi protocols and companies on the market, including Aave, Compound, and FTX, got together to discuss the current state and plans of both their own projects and the entire DeFi space. Despite the different natures of their companies, all of them shared the same opinion—that DeFi has gotten too crazy.

However, they all agreed that despite the craziness, DeFi is still in its infancy. It will become successful, they concluded, when it becomes boring again.

Dissecting the current state of DeFi through the eyes of Aave, Compound, FTX, Solana, FTX, and Sino Global Capital

While the crypto industry as a whole is still in its infancy, it has already been shaped into a major driving force on the world market. This is at least partially due to the massive growth of decentralized finance, which brought about an unprecedented influx of new money into the space. The total value locked into DeFi has well exceeded $10.3 billion as of Sep. 23, seeing an increase of over 2,000 percent since the beginning of the year.

Screengrab showing the total value (USD) locked in DeFi from Sep. 2019 to Sep. 2020

(Source: DeFi Pulse)

This, however, is just the beginning.

During an online panel discussing the launch of FTX’s newly launched Serum exchange last month, some of the most notable names in the world of DeFi discussed the current state of the innovative industry, sharing their perspective on how to grow it.

Hosted by Sam Bankman Fried, the founder of Alameda Research and FTX, the panel included Stani Kulechov, the founder and CEO of Aave, Robert Leshner, the founder of Compound, Anatoly Yakovenko, the co-founder of Solana, Matthew Graham, the CEO of Sino Global Capital, Tushar Jain, the founder and partner at Multicoin Capital, as well as Tristan Yver, the operations manager at FTX.

All of them agreed that despite its current size, the DeFi space is set to see a lot more growing. Bankman Fried, the brain behind FTX’s incredible growth in 2020, said that solving the congestion issues decentralized protocols have been notorious for would unlock even more power and potential for the space. If such potential was realized, Graham noted, it would allow more new people to be onboarded onto protocols that could then see real-world applications.

Graham, who heads one of the largest crypto hedge funds on the market, noted that despite its massive growth, most of DeFi’s volume comes from crypto-savvy users trading with each other. This could be because DeFi still feels like a pilot project. Jain said that protocols “need to feel more like CeFi” to attract a large number of users that would take to the mainstream. The space is now filled with users that are willing to undergo the hassle of using decentralized finance in its current, beta-like phase to help lift the systems off the ground. They’re enduring collateral ratios that are too high, speeds that are too slow, and liquidity that is at the very least concerning, he explained.

Foundations, foundations, foundations

Leshner, the pioneer of money market protocols on Ethereum, believes that we’re currently well into the mania phase of DeFi. The incredible surge of unaudited new projects and forks in the space shows that everyone is looking to ride the existing wave started by projects such as YAM and YFI—very few, he said, are working on building strong foundations for their projects.

The biggest tradeoff companies in the DeFi space are faced with is deciding between building safely and building quickly. However, it’s more of a cultural than a technical issue, Leshner noted, adding that all of the “good processes” developers need to follow are already there. The culture of cryptocurrencies is quick and doesn’t value safety, pushing people to move too quickly to try and capture moments in time instead of focusing on foundations.

Some companies in the space are looking to strengthen these foundations, though. Stani Kulechov, the founder of decentralized protocol Aave, said that his company was looking to reutilize the value currently found in lending and borrowing in other parts of DeFi by looking at layer two solutions for Ethereum. This would not only enable the creation of more products that would utilize the liquidity available from lending and borrowing protocols but also remove inefficiencies associated with Ethereum and improve the overall accessibility of DeFi. Having a system where you can utilize its accumulated capital and build other products on it is the most important aspect of DeFi, Kulechov noted.

But, once strong foundations are developed, the industry will face another major problem.

Namely, having multiple stable and scalable projects that cannot communicate effectively reduces both their utility and network effect.

Building ecosystems connected with cross-chain communication

Yakovenko, who founded the cross-chain solution Solana, believes that creating bridges between various block spaces is the key to the success of decentralized finance. In his opinion, the best way to continue growing the DeFi ecosystem is to make block space more fungible. He believes that projects that allow users to seamlessly migrate from other networks will be the ones that bring in the largest user base.

This aligns with Bankman Fried’s definition of success. When discussing the factors that determine a project’s success, he said it was the number of people and other projects utilizing the network. However, he did note that it’s becoming increasingly difficult to incentivize people to build new things when easy money is waiting around virtually every corner in DeFi. He also said that there was a significant rise in demand for cross-chain functionality across the DeFi industry, which indicates that more projects are beginning to see its value and take it seriously.

Jain, whose company invests in crypto and blockchain companies, said that DeFi as a whole has now become bigger than just Ethereum. And it’s this knowledge, he later explained, that shows cross-chain functionality is going to be one of the most interesting things happening in DeFi in the next few years.

A venture capitalist’s view of success is one that includes an ecosystem. Graham, who heads a successful global investment firm focused on blockchain companies, says that one of the best signs of success is winning the developer mindshare. The vision Alameda Research and FTX have for Serum, he explained, is one that includes an ecosystem, which is why Sino Global Capital decided to invest in it.

Waiting for DeFi to become boring again

The massive amount of noise in the DeFi industry certainly makes it hard to sift through all of the get-rich-quick schemes.

While speaking to other panelists, Leshner compared the current state of decentralized finance to the 2017 ICO boom. The huge number of people involved in the space are there only to chase a quick buck, participating in zero-sum games that create no value. According to Kulechov, DeFi looks exactly like the mindless fundraising in 2017, just minus the innovation. Continuing down this road could lead to the worst-case scenario, which is having the incredible amount of innovation in the industry wiped out by protocols such as YAM exploding and taking everything down with it. Kulechov also highlighted the fact that the billions of dollars locked in DeFi make all protocols vulnerable to hacks, which could have an even bigger effect on the broader market than a liquidity implosion from a single project.

A veteran in the Asian crypto space, Graham explained that the shockwaves from the FCoin scandal have shaken things up so bad in China that it could take years before the market fully recovers—both in terms of a loss of funds and a loss of trust in cryptocurrencies. That’s why projects that want to survive the current bubble should take security quite seriously.

And in a market as big as Asia, even a slight change in the percentage of users coming from the region could make or break a project. Kulechov noted that more and more DeFi projects have begun seeing a surge in users coming from different parts of Asia, with significant communities already forming around Aave.

Tapping into this market, however, is not an easy feat. From Graham’s experience, establishing a significant presence in Asia requires projects to establish a significant physical presence in Asia. “You can’t outsource marketing teams,” he said, explaining that without the help of bilingual people that have got the feel for the market, there’s no way of succeeding in any Asian country.

But what is success?

From an investor’s point of view, success is creating new use cases for innovative technologies. Jain noted that the best places to look for the “next big thing” are places that “aren’t hot.” These include things that are technically outside of DeFi, such as storage, Web3, and hardware, he said. Kulechov shared this sentiment about major things happening outside of the very narrow definition of DeFi, adding that he was extremely bullish on utilizing DeFi technology in e-commerce, collectibles, NFTs, and storage.

All of this, everyone agreed, was the definition of boring.

Yakovenko said that penetrating into boring finance is when DeFi will see its heyday, with Graham noting that the only sustainable innovation was boring innovation. The kings of DeFi all believe that the true age of DeFi will only begin when it becomes less experimental and attractive to boring capital.

“Bitcoin nailed boring,” Leshner said. Now it’s time for DeFi to do the same.