What is DeFi?
Decentralized finance (DeFi) is a new paradigm that is emerging within the financial services space. Driven by distributed ledger technology and open source software, and encouraged by better-aligned incentive and governance structures, this new system allows users access to open and permissionless financial services while also granting individuals complete control over their wealth and personal data. DeFi is completely transparent, with no counter-party risk as all agreements are arbitrated by smart contracts which always execute as planned. Additionally, under a DeFi construct, software largely ‘eats the world’ of centralized finance, fostering high levels of efficiency and dramatically lowering friction and cost.
While there are clear advantages to DeFi, it is still a very early movement largely driven by early adopters of blockchain and cryptocurrency. The question is how best to catalyze adoption and foster widespread use of DeFi. Looking at Mozilla Firefox c. 2006 and Uber c. 2008, provides an interesting comparison on different strategies for taking new and disruptive ideas, and bringing them mainstream.
A quick history of DeFi
While it is difficult to pinpoint the precise inception of DeFi, the movement as it is known today was created by the publication of Satoshi Nakamoto’s 9-page white paper, Bitcoin: A Purely Peer to Peer Electronic Cash System in 2008. In the paper, Nakomoto (whose true identity is still unknown) describes “a purely peer-to-peer version of electronic cash that would allow payments to be sent directly from one party to another without going through a financial institution.”
After the white paper was released, Bitcoin was created and offered to the open source community in 2009. Bitcoin was built on a Proof of Work concept, where the underlying blockchain executes expensive computer calculation or ‘mining’ to create the next block. In 2015, Vitalik Buterin and others built Ethereum, the first blockchain network that allowed the storage of assets other than currencies (i.e. contracts, agreements) through smart contracts.
As the core technology and surrounding community evolved, use cases for blockchain technology grew dramatically. True to Nakomoto’s original white paper however, a principal use case is the decentralization of the financial services industry, or DeFi.
Current adoption of DeFi
Borrowing from Carlota Perez’s Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, it seems that the blockchain space is moving into what Perez calls the ‘frenzy’ stage. In the prior ‘irruption’ phase, speculative value flowed into the space, bubbling into the ‘big-bang’. However, the speculative value significantly outpaced utility value, which ultimately led to the cryptocurrency crash in late 2017 and the subsequent ‘crypto winter’. Development activity in the blockchain ecosystem still remains strong, and as bad actors are removed from the ecosystem, a new set of default platforms have emerged which will define the next evolution of the space.
From a market size standpoint, of the 7.5 billion people in the world, ~40 million have used cryptocurrency and 2 million possess non-custodial service wallets. However, the number of users actively engaged in using DeFi services specifically is likely only in the tens of thousands.
Looking at DeFi Pulse, as of May 2019 there is ~$550m in total value locked within the DeFi ecosystem, the bulk of that on lending platforms. While this is a positive signal, it by no means represents the potential impact and scale that DeFi brings.
What is the best way to catalyze adoption and foster widespread use of DeFi? Let’s start by examining Mozilla Firefox c. 2006, and Uber c. 2008.
Two schools of thought for widespread adoption
Mozilla: Concentric Circles
Firefox was created in 2002 under the codename “Phoenix” by Mozilla community members who desired a standalone browser. During its beta phase, Firefox was popular with testers and was praised for its speed, security, and add-ons compared to Microsoft’s then-dominant Internet Explorer 6. Upon release in late 2004, Firefox achieved 60 million downloads within nine months and proved a challenger to Internet Explorer 6. Encouraged by early success, the Mozilla community set out to grow the Mozilla network.
In 2004, the Mozilla community launched the “Spread Firefox” (SFX) campaign with the goal of facilitating widespread adoption of the Firefox browser. Under the slogan “We’re Igniting the Web, Join Us”, SFX boasted a community-built browser predicated on grassroots development efforts, trust, and superior technology to the competitive browsers at the time.
Chris Messina, an early participant in the group, described the existing Mozilla community at the time as a group of concentric circles with the inner-most circle belonging to enthusiasts and early adopters. Messina described SFX’s purpose as “creat[ing] a black hole suction of sorts deeper into the inner community. [Our] theory was that the more folks we could bring into the inner rings of the Mozilla community, the more devoted they’d become and the lower the incremental effort we’d need to pull in more outliers, like their friends, coworkers and family members.” Messina hypothesized that “just like in a presidential campaign, you’ll be enticing folks with a truly valuable service, [who will] then turn around and preach with more convincing passion, integrity and self-interest than you could. SFX relied on concentric circles of true believers to spread the word.”
Messina and the SFX team were of the belief that keeping design and development efforts focused on a small, tightly-knit core of enthusiasts would create a ripple effect to wider audiences through the concentric circles approach. There is no doubt that this was a successful strategy, as Firefox usage grew to a peak of 32% at the end of 2009, with Firefox 3.5 overtaking Internet Explorer 7.
However, looking at the web browser landscape today, Firefox only represents 6.1% of market share while Google Chrome (a much later arrival) holds a dominating 63.6% with the next-highest browser, Safari, still doubling Firefox at 13.2%. An illustration of just how dramatic this reversal was can be found below:
So why did Mozilla, initially a community-driven, technically superior product with a strong network and early traction, ultimately fall to Chrome? A potential answer can be found by looking at Uber’s adoption strategy.
Uber: “1-Click Car Service”
The idea for Uber (originally UberCab) was born in August 2008. The Uber founding team, Travis Kalanick and Garret Camp, observed that the existing taxi industry was outdated and proposed a “fast and efficient on-demand car service” that offers the “convenience of a cab in NYC and the experience of a professional chauffeur”, or more simply “the NetJets of car services”. Below is an image from their original pitch deck, which outlines Uber’s key differentiators:
Interestingly, the technology behind the platform received only one slide—with no mention of the peer-to-peer foundation on which Uber was being built.
Since then, Uber has become a ride-sharing market leader. Spanning six continents and 700+ cities, more than 10 billion trips have been booked through the Uber platform to date. Revenue derived from Uber’s ride-sharing products grew from $3.5 billion in 2016 to $9.2 billion in 2018, while gross bookings grew from $18.8 billion to $41.5 billion over the same period. In other words, Uber has achieved market traction.
What was the difference?
So why did Uber ‘succeed’ where Mozilla ‘failed? Sure, they are drastically different markets and Uber has the powerful engines of venture capital funding backing the company. However, there are inherent lessons to be learned when examining the approaches of the two companies—which can then be directly applied to facilitating DeFi adoption.
When considering Uber, at the core of its product is a peer-to-peer technology that connects riders with drivers while also enabling a frictionless payment experience. Additionally, through GPS enablement, Uber’s platform ensures drivers and riders are matched optimally and efficiently. However, the team at Uber did not focus on technology as a core value proposition. Instead, they focused on improving what was an outdated industry by giving people an easy UI/UX that allowed users to push a button (or at the time send a SMS) to call a car which would show up, take them where they need to go, and automatically facilitate payment.
Mozilla on the other hand, used a community of technology-first enthusiasts who were deeply versed in the Mozilla product as conduits for adoption. In Messina’s words, Mozilla relied on those who could speak with the most conviction about Mozilla, to drive its adoption.
At the highest level, it was a push-versus-pull-strategy. While Mozilla was pushing the deep technological benefits of Firefox to users, Uber relied on consumers simply understanding the benefits based on their frustration with the taxi industry at the time. Uber was not technology-first, and were by no means enthusiasts and “true believers” of the platform. Uber simply understood the existing problem, and trusted consumers to recognize the power of their solution. Looking at both companies today, it is clear which has gained more adoption.
How does this apply to DeFi?
Today, at its largely nascent stage, the DeFi space is still predominantly composed of early adopters of blockchain and crypto who have a deep understanding of the underlying technology stack. Additionally, many of these community members are first and foremost attracted to the decentralized nature of DeFi and the ability to separate themselves from the intermediaries and central powers of authority in the existing financial system. While these members were important to the inception of the DeFi movement, they do not represent the average consumer.
The average consumer does not necessarily care what rails their financial services technology rests on, and they do not want to understand the blockchain stack. Using words such as “uncensorable” or “permissionless” will not grow their desire to engage with the DeFi space. As illustrated by Uber, all that most consumers concern themselves with is whether the new solution is a faster, more convenient, and ultimately cheaper version of what they are using today. In the case of DeFi, another capability that the average consumer may also consider is whether financial tools and products that are available under a DeFi construct do not currently exist in the centralized financial system.
In the current DeFi environment, these value propositions are not immediately clear. Issues with latency, scalability, usability, interoperability — just to name a few — represent major barriers which need to be solved. However, as progress is made and existing issues are fixed, demonstrating DeFi’s ability to offer faster, more convenient, and cheaper services while also providing net new capabilities (prediction marketplaces, tokenization, stable coins, etc.) will offer the clearest rationale for transitioning to a DeFi construct.
Companies and solutions that are predicated upon demonstrating those value propositions, rather than simply toting the decentralized nature of blockchain and DeFi to a core group of enthusiasts, are the ones which will accelerate DeFi adoption. Users should not have to understand blockchain, protocols, dapps, hashing, forking, cryptoeconomics, tokens or even know who Satoshi Nakamoto is.
Instead, in the words of Steve Jobs, all that users need to know is that “it just works”.