Network Effects and Flywheels in DeFi for Institutions - Blockdaemon

Network Effects and Flywheels in DeFi for Institutions

By: Conor Keville

Learn about the network effects and flywheels driving DeFi adoption for institutions. Explore the benefits and opportunities in the decentralized finance space.

Recently, The Block hosted a webinar on the topic ‘ Network Effects and Flywheels in DeFi for Institutions’.

The conversation featured four panelists:

All participants are subject-matter experts in the field of DeFi (decentralized finance). Blockdaemon’s CEO & founder, Konstantin Richter, was one of the voices in this discussion, presented by Blockdaemon. Today we’ll recap some of the key highlights from the webinar. This includes:

What is DeFi?

“ Anything that allows you to do what a bank does in a decentralized manner.”

In essence, plugging into decentralized equivalents of traditional financial services. These services leverage smart contracts. Imran Khan, (Lead at DeFi Alliance), agreed with Konstantin. In his words, he views DeFi as a ‘self-driving bank’. Layer-1 DeFi protocols such as the Ethereum blockchain and Solana facilitate new types of behaviour, using smart contracts. An example here is lending. DeFi loans use smart contracts which govern the risk, loan-to-value (LTV) and collateral size.

No central bank authority governs these rules, except for the smart contract creators themselves.

What’s the current state of institutional adoption in the DeFi industry?

Konstantin splits institutions into three different categories.

All of these institutions sit on different areas of the spectrum when it comes to DeFi adoption. According to Konstantin, each has different thinking about touching, integrating and offering DeFi services.

Has there been an increase in interest from institutional investors over the past few months?

“ There is absolutely no doubt that institutions are getting more involved”. These were the words of Aya in response to this question. Aya says Falcon X receives between 10 - 15 inbound institutional client requests weekly. Institutions are beginning to have conversations around DeFi.

DeFi Adoption: where will it come from?

Where will DeFi adoption flow from? Legacy institutions or crypto-native apps?

Konstantin believes that the biggest mass adoption of crypto will come from the legacy financial rails. Everyday people will earn yield on tokens not knowing what the underlying assets are. However, that must be balanced with crypto-native services. Brian Norton (COO of MyEtherWallet), agrees that both legacy institutions and crypto-native infrastructure is important for DeFi, “ I think that you absolutely do need both …

For Konstantin, institutions provide liability and insurance for DeFi services.

Most Popular DeFi platforms

The panel called-out a number of great DeFi platforms. Imran sees Solana in particular as a key platform for DeFi. “ A lot of the innovation is still happening on Ethereum”, Imran says, “ a lot of the institutional sandbox tests and protocol development is happening on Solana .”

Winning DeFi platforms of the future

Konstantin opened this side of the panel discussion with a look at what the key ingredients are in winning DeFi platforms. He commented, “ you need really heavy pockets, technical feasibility (although that’s not a must, we’ve seen protocols scale with terrible technology), yet the sad reality is that the money that’s pumped into the system is a really important factor to incentivize certain behaviours.”

Aya believes it’s not a “one size fits all model.” In this vein, Aya continued “ you’ll see different protocols win specific niches.” Imran offered a more blockchain-agnostic perspective:

“ What do people care about? Do they just want to use a product and call it a day? Are they going to worry about if it comes from Solana or Ethereum? In my high-level thought process...people are probably not going to care where it comes from.”