Decentralized Finance for the Rest of Us
Thoughts on how we can make DeFi more accessible
A Little History On How Computers Went Mainstream
January 24, 1984, was a historical day. Preceded by an iconic ad that showed a nameless runner in an athletic uniform racing towards a large screen with the image of a Big Brother-like figure and hurling a sledgehammer. The Apple Macintosh was introduced as The computer for the rest of us.
It was the first general-purpose computer with a mouse, monitor, and a graphical user interface targeted toward the masses. Up until then, computers were mostly used by people who were technical and knew how to find their way around with terminal commands.
The launch of Macintosh marked the paradigm shift in Computers from a technical Command Line Interface to a more intuitive Graphical User Interface. It ushered in a new era of personal computing, one that was far more accessible and friendlier.
There are about 4.3 Million unique wallets. This pales against the total number of crypto users which is estimated at 300 Million.
We have visionary power users and crypto natives participating in the DeFi ecosystem. This is driven by a combination of the idealist alignment around self-custody and decentralization, newer and interesting instruments, and short-term opportunistic plays. However, the mainstream users or the pragmatists will need much more than to make the leap of faith from Tradfi and CeFi to DeFi.
Consumerization of DeFi
Three issues ail DeFi today — Cost, Complexity, and Risks. Ethereum remains the leading chain in terms of the DeFi ecosystem. But remains exorbitantly expensive for somebody to get started with a $100 deposit. L2s and alt L1s exist, but they still require a user to be fairly technical to navigate through multiple platforms, chains, bridges, and tokens to do anything useful. And the fact that over $10 Billion worth of crypto assets were lost to hacks in 2021 doesn’t evoke confidence amongst late adopters.
Making onboarding on DeFi financially accessible
Over the last 4 years, multiple L2 scaling solutions for Ethereum and sidechains such as Polygon, Arbitrum, and Optimism have emerged. The total TVL on these chains is now over $7 Billion and growing steadily. At the same time, challengers/alt L1s such as Solana, Avalanche, and Fantom are also gaining traction on the promise of higher throughput and low cost.
While these are still early days and it is hard to predict if we’re headed towards a world dominated by Ethereum augmented by L2s or alternative scalable albeit less decentralized L1s or a world between these two. But what is very clear is that to onboard the early majority of the users, Web3 Buidlers will have to have the DeFi onboarding more economic. This means that the bulk of the next wave of users will arrive directly on L2 Chains and Alt L1s.
There are multiple layers of complexities users have to navigate today. This starts with the first step of setting up a crypto wallet.
Solving for self custody
Over decades of acclimatization, people have reached a point where they manage their online accounts on social media, banking, email, and more through a combination of passwords, password managers, and 2FA over phone or text messages. Cryptocurrency wallets present a paradigm shift where the client software is the gateway to everything happening on-chain.
But to ensure you retain access to your on-chain accounts, you need to securely save a 12 or 24-word phrase that is used to generate the private key.
A google search on how to save your wallet passphrase gives the answer shared above. None of the aforementioned options is something that a non-power user can use.
Argent came up with an innovative solution for this that didn’t require a passphrase by introducing a concept of social recovery where you add guardians to your wallets. Guardians are third-party services such as email/text message/2fa etc. or other people with wallets that can help you recover your wallet, lock it, or transfer ownership. While this is not a perfect solution yet with high gas fees on Ethereum, it can be extended to solve the current gaps in self custody which are to recover access to your assets and in event of an unfortunate happening transfer them to your family as a form of inheritance.
Onboarding oneself on DeFi today requires navigating multiple platforms and chains. Acquiring native tokens from exchange to bridging them to L2 chains, and deploying funds on DeFi protocols is anything but simple. The next wave of users will require something simpler and more integrated. Wallets act as a gateway to everything happening on the blockchain(s) including DeFi. They will need to include robust onramp and offramp experience along with abstracting out complexities around protocols and on-chain transactions.
Optimizing for mobile
A little more than 50% of internet traffic is from mobile devices. Over the last decade, smartphones have taken over as the platform on which people spend most of their time. There is a whole generation of internet users for whom smartphones are either the primary computing device or the one they grew up with. For DeFi to go mainstream, providing a seamless experience on mobile is going to be pivotal.
Making DeFi safe
DeFi is an emerging phenomenon and fraught with risks. The Lunacrash in May 2022 that wiped out $40 Billion is a bitter reminder of how early we are. The first step towards making DeFi is educating users about the different underlying risks when they deploy crypto assets on a protocol. An unfortunate reality of the Luna Crash and the ultimate demise of Anchor Protocol was that scores of people placed it in the same risk bracket as their savings account. In fact, if we look purely from a technology standpoint, there are risks present at each layer of the ecosystem.
Today, as a user you have to put in a significant effort to educate yourself on these risks, and then look up relevant data points across multiple platforms. But there is a better approach possible. Platforms such as DeFiSafety provide a comprehensive review from a process standpoint. Gauntlet Network publishes reports on market risks within protocols, and independent smart contract audit firms share audit reports from a technology and security standpoint. Considering wallets are the entry point to DeFi, they can play a critical role in surfacing this relevant information to the users.
Beyond this, protocols such as Nexus Mutual and Solace Finance provide have started offering products to provide coverage for protocol hacks. While the cost of coverage today is high, with scale and maturity these should become more accessible and ensure users can take up coverage easily while moving funds into a protocol.
We’re in the early days of a crypto winter now with the larger looming economic recession. The next few years are going to be difficult. But if we take a step back, during the last bear cycle DeFi TVL was looming somewhere around a couple of hundred million dollars. In contrast today it is in billions. While sentiments are down, this is the time to build a better, safer, and more accessible DeFi for the wave of users who will arrive in the next cycle.
I’m the co-founder of Brew Money where our goal is to make Defi accessible for everyone. Brew Money is a Non-Custodial Polygon Wallet that makes it simple for non-power users to create stable coin deposits on DeFi protocols and earn up to 10% APY.
DeFi Adoption Is Still Far From Mainstream: Chainalysis
Mainstream adoption of decentralized finance (DeFi) protocols remains at an early stage relative to the wider crypto…