We’re doubling down on DeFi
The future is decentralized
There’s been a lot about crypto in the news recently, but for those of us building in the space long-term, all the (crazy bad) news reinforces our original thesis: the future is decentralized.
We’ve been building in DeFi (Decentralized Finance, i.e., transparent, open source, peer-to-peer financial systems built on blockchain technology) since before DeFi was even called DeFi, and we’ve seen the evolution and growth first hand. Today, we want to share why we are more optimistic than ever about DeFi—and how our thoughts on bringing it to the mass market have evolved.
For context, our team has been working on two initiatives over the last year:
- [Public] Bringing DeFi to everyone, via the Hightop app — a financial management app with FDIC-insured accounts and debit cards (offered through our bank partner), and one-click access to DeFi yields.
- [Stealth] Contributing to a new DeFi protocol, Ripe. This is an infrastructure layer designed to support mass market DeFi adoption (via consumer apps like Hightop and others).
DeFi Didn’t Break, CeFi did
DeFi is a new way of thinking about financial systems —and we are the first to admit that it can be hard to access! Today, it takes technical and financial knowledge, time, security know-how, and bridges between fiat and crypto assets.
That’s why CeFi — Centralized Finance — has sprung up in the last 2 years. CeFi companies help users access pieces of what is happening in web3, like buying and holding cryptocurrencies and earning yields via DeFi. But while abstracting away the work, CeFi also abstracts away risk and knowledge, and most importantly, ownership.
A CeFi company takes custody of your digital assets and therefore effectively “owns” them. Because they don’t put their full ledger on the public blockchain (“on-chain”), no one really knows what is happening with assets—they are opaque “Black Boxes.” And while most CeFis are good actors, that Black Box factor means we never fully know who is over-leveraged, where funds are, or what decisions are being made about your assets.
After seeing Black Box after Black Box implode this year, we believe even more in the true transparency of DeFi. In DeFi, you don’t need to trust a well branded app, big name investor, or charismatic founder. You can trust code. In contrast, CeFi players have seen their downfall come from:
- Blatant fraud (FTX)
- Unsecured off-chain lending to hedge funds and other institutional players (Celsius, BlockFi, Genesis)
- Trading in and out of assets behind the scenes, without the user knowing (Celsius)
- Wrapping around the Anchor protocol, which solely used Terra/Luna which wasn’t fully on-chain (Stablegains, Alice)
In the meantime, DeFi is strong, stable, and doing exactly what it set out to do. All year, blue-chip, fully on-chain protocols like Aave, Maker, and Compound have been standing strong despite market volatility. Smart contracts are humming along, instantly liquidating people if they don’t top off collateral or pay their debt—no human intervention required. The result: everyday DeFi users weren’t left “holding the bag” like they were in CeFi.
As the saying goes, DeFi didn’t break, CeFi did.
Technology & Trust
Our strategy at Hightop has always been to build on top of DeFi. Mick Hagen, our CEO, has been at the frontlines of DeFi since the beginning, building at the edge of every major innovation: from serving on the multi-sig of SushiSwap to creating the BasisCash Discord to rebuilding Yam and facilitating Polychain’s entry into Olympus.
tl;dr: we’re DeFi natives, and we believe that DeFi opportunities should be brought to everyone. Our original vision (which Mick talks about here) hasn’t changed.
But how we get there, and when we get there, has evolved. There are two reasons why: technology and trust.
In 2021, we thought the future was CeFi. We brought on $100M of assets under management and deployed those funds in a risk-adjusted basket of DeFi opportunities (generally providing stablecoin liquidity on DEXes like Curve/Convex). And we successfully delivered high yields of up to 18% to our clients. We were as transparent as we could be at the time—clients had our Zapper account, could see every transaction our team made in DeFi, and weekly reports shared every position and protocol we used—but our whole process wasn’t on-chain.
And that’s where the tech comes in: right now, it is hard to build mainstream consumer applications on top of DeFi. DeFi is like raw money LEGOs, without the little instruction book telling you how to connect the pieces. We couldn’t do many of the things we really wanted to do — like automatically manage a portfolio of yield strategies, or allow clients to borrow against their productive collateral.
So our team of DeFi natives — including smart contract developers—began to contribute towards building the technology we needed, in the form of a DeFi protocol. It solves the problems we experienced, and as a permissionless, decentralized protocol, we think it can also solve problems for others in both CeFi and TradFi. (More on this protocol at the end!)
We even believe in this transparent, decentralized future so much that in April of this year (for those tracking, a good month before the Terra / Luna meltdown) we decided to return all client funds. We only want to steward funds when there’s the right transparent, DeFi infrastructure in place to do so.
In retrospect, it’s easy to say that we “got lucky” by returning client funds before major collapses. But our strategy and point of view never relied on luck: we only held risk adjusted positions, and never sacrificed security or strength to get higher yield. When some CeFis took on riskier positions (like uncollateralized loans to hedge funds) to to deliver higher yields, we kept plugging away at low-risk, collateralized loans via DeFi. Which is to say, clearly: our CeFi product was not like the cases (Celsius, BlockFi, Alice, etc) detailed above.
But there’s been another significant shift in the past year that does affect us: consumer trust in the industry has been broken. Two million customers put money into Celsius before it went bankrupt, and they may never see their money again. FTX may have stolen the bulk of its $8B client funds.
As Benedict Evans recently wrote of FTX: “if you start an exchange for trading a thing and then steal or lose your customers’ balances of that thing, this tells us little or nothing about that thing itself. But that doesn’t mean there isn’t a shift in sentiment, and all sorts of cascading consequences.”
Consumer trust needs to be re-earned after the events of this year. And we believe we earn that trust through transparency, and thereby starting with DeFi.
The Future of Hightop
Today, we’re officially doubling down on DeFi. That means putting Hightop on the shelf for now, and joining the ecosystem of technologists and developers supporting Ripe Finance, the decentralized protocol our team has been contributing to.
Today, some 5 million people have used DeFi directly. There are approximately another 25 million people with web3 wallets, who, with a little onboarding, are the next wave to come into this weird and incredible world. On the far other end of the spectrum, we believe that the 1 billionth user to touch DeFi will have no idea they are using blockchain technology.
We have strong conviction that someday, consumers will want an easy DeFi experience–with features like fiat onramps, custodial wallets, and password recovery. That sounds a lot like Hightop! Once the infrastructure technology is ready (👋 Ripe) and consumer trust is built, we’ll be back.
The tumultuous last few weeks have given us even more conviction that DeFi — trustless, permissionless, transparent, peer-to-peer financial systems — is the future. And when you see the future so clearly, the only thing to do is go all in and double down. 🍋 🍋 🍋
p.s. Do you hear DeFi calling your name? Join us over at Ripe! Start with the Docs, join the Discord, and follow Ripe on Twitter.
