Earlybird welcomes M^ZERO Labs to the portfolio!
🚧💰The connective tissue between traditional financial institutions & DeFi
By Partner Tim Rehder and Akash Bajwa, Earlybird Digital West
Ruptures in the crypto market over the last 12 months have intensified calls for transparency, accountability, and regulatory oversight.
Polemics have been launched against centralized (yet lightly regulated) actors who misappropriated customer funds, as well as decentralized protocols that have demonstrated limitations in their current governance models. Market valuations have corrected sharply, significant wealth has been lost, and users’ trust needs to be earned again. In order for market valuations to fully recover, it is imperative to go back to getting the business and technological fundamentals right.
In our view, this makes it a perfect opportunity for experienced entrepreneurs and long-term thinkers to build the necessary infrastructure and the greatest products on top.
Throughout these tremors, leading DeFi projects like Uniswap, Aave, and Curve demonstrated the merits of decentralized protocols by continuing to function without fault. Smart contracts continued running as they were programmed to, 24x7x365.
Although capital allocation into crypto had outpaced progress last year, software continues to march onwards and eat into the proverbial $25 trillion financial services pie. The IMF concluded a study into fintech by predicting that DeFi ‘has the potential to offer even more innovative, inclusive, and transparent financial services thanks to great efficiency and accessibility’.
💼 🏦 Defi’s inherent advantages are a secular tailwind of institutional adoption
DeFi’s inherent cost efficiencies are self-evident relative to fintech and traditional financial services. Uniswap, for example, operates at 10x the cost efficiency of Coinbase, a leading centralized exchange.
Given these advantages, we’ve seen traditional financial institutions like Societe Generale, BlackRock and JP Morgan seeking to leverage DeFi rails to source and serve liquidity, although with the level of prudence that characterizes those institutions. Momentum towards more institutional participation has been building at the protocol/infrastructural layer too, such as Aave Arc and Maple’s permissioned protocols with KYC and AML protections. Whilst these developments are encouraging, these first endeavors fall short of what is required to sustain institutional-level transaction flows and therefore we see considerable opportunity to build the requisite infrastructure that provides the connective tissue between DeFi and financial institutions.
Momentum towards more institutional participation has been building at the protocol/infrastructural layer too.
Another secular tailwind is the increasing penetration of stablecoins. This programmable, composable, and permissionless nature of money is what many heralded as crypto’s killer use case — USDC has facilitated at least $30 billion worth of economic activity in 2022, spanning remittances, payments, trade receivables, lending, and many use cases yet to be discovered.
The total market cap of stablecoins is just north of $100bn, a minuscule fraction of the total US dollar money supply of $2.3tn dollars. Centralized issuers of stablecoins are deriving the majority of their income from the yield on the underlying treasury instruments, with holders forgoing this yield entirely — but not the underlying counterparty risks involved. It’s a lucrative business for these companies that deny consumers any participation in the value creation.
In doing so, the M^ZERO protocol will leverage previous formulations of governance in a way that mitigates bad actors and provide the connective tissue between global (and most often supervised) financial institutions and permissionless DeFi.
Meet M^ZERO Labs
M^ZERO Labs’ team has spent years at the coalface of the financial services and crypto industries, observing the faults in infrastructure, governance and incentive models.
Given our history with Crosslend and our long term view on the DeFi segment, we were immediately convinced about the proposition of acting as the first provider of connectivity and capital between the future M^ZERO protocol and legacy financial institutions. We think the current stablecoin value proposition is ripe for a challenge and believe this team provides the absolute perfect founder mix to do that.
We are excited to be among those supporting Luca, Greg and Oliver (again!) in their journey to bring institutions on-chain with the values of transparency, censorship-resistance and composability.
Discover more about them here.
