Part 3: The future of Decentralized Finance — Curation and Automation with Spool
This is Part 3 of my “Why Spool?” blog series, where I lay out the conception, reasoning, and mechanics behind Spool as it happened in my head. Accuracy, detail, and factuality may be compromised in favor of casual language and bad jokes. For detailed information about Spool, refer to our Website, Gitbook, or Litepaper. Read the other Posts here: (Part 1) (Part 2)
What is DeFi’s “Equilibrium State” and what could it look like?
DeFi is currently in a state of flux where we oscillate between enjoying the current success and achievements of the tech, or we are chasing the high of that new killer app that might bring in the masses to magically create a new worldwide standard for personal and institutional finance.
Indeed, even though “wait until the normies come in” has been the go-to morale boosting war cry for more than one struggling blockchain project out there, DeFi is by no means struggling right now.
But the constant chase for more TVL and adoption undoubtedly focuses our collective gaze on the big money that has trained billions of retail users to see their own money as something increasingly more digital. Both the traditional finance industry and the fintech giants are capturing these users and are turning digital transactions and payments from our phones into a normal thing.
But what could a “mature” and less volatile DeFi industry look like? An “Equilibrium State”, where most of the potential capital is captured and innovation becomes more iterative than disruptive. Let’s take a closer look at that question and how Spool might fit into it.
Who brings the money?
Right now, the vast majority of TVL comes from people who understand how Decentralized Finance works, and how to directly operate it. But the collective goal of DeFi isn’t to remain a contained phenomenon within the blockchain community, but to launch a good old vampire attack on traditional finance, and make DeFi accessible to everyone. But what would a collective migration from TradFi to DeFi look like if it were to happen?
Most people don’t have the time nor the willingness to understand how finance works. They are happy if someone tells them “your money is safe” and “number go up”. Setting aside the fact that the latter is becoming harder and harder to achieve for your average joe, people don’t really want to be “their own bank”. That sounds like a lot of work, and the general consensus (at least in my circle) is that most people have enough on already.
Bringing in the masses means bringing in capital from parties that are two or even three degrees removed from both DeFi and blockchain. They are on average unwilling to change their current habits, no matter how much we try to persuade them. This means DeFi must adapt to this audience if it is to go mainstream, not the other way around. Which means ease of use and curation will be a key factor for the masses that just want to be told where to put their money and do it with the simple click of a button.
We don’t need to eliminate middlemen — we just need better ones!
While being your own bank may sound good to you and me, we are the minority. The majority thinks that being in charge of their own private keys is stressful! Similarly, how stressful would it be for the majority to be directly responsible for the details of how their invested money is managed? That’s the reason why they give their money to banks, funds, and account managers — middlemen.
Right now DeFi is very good at eliminating middlemen and the fees that come with them, but what if instead of eliminating them, we provided a substitute for the audience that actually WANTS a middleman to take care of things? We can’t just eliminate middlemen, we need to actually replace them with something better.
Luckily, good UI design, smart contracts, and algorithmic portfolio managers can be combined to digitize and automate middlemen, so there is a clear perspective to solve this issue. Spool provides a toolbox that allows a simple creation of automated DeFi portfolios that can be tailored for any use case and risk profile, and most importantly integrated with any UI. This allows Spool creators to focus on the needs and wants of their audience and amazing UX instead of the manual creation of infrastructure.
Of Capital Aggregators, Yield Generators, and their future together
Let’s face it — the next trillion dollars moving into DeFi will not come from people like you and I, clicking around on our hardware wallets to approve transactions via MetaMask. It will come from the unwashed masses of people who are repelled by our made up Web3 vocabulary. Taylor Monahan of MyCrypto made some great points with examples last year.
If your uncle or grandma opened a website and before seeing anything, they were asked to “Connect their Wallet” without any context, they’d probably shut down their computer and call the poor “computer person” in their family to tell their tale of almost getting hacked.
That’s why we will see various forms of Capital Aggregators that will emerge with the core business model of capturing the yields offered by DeFi while making them accessible to a specific client base that is unable to access DeFi on their own — a huge market.
These Capital Aggregators will focus on gaining the trust of their audience and making the act of investing capital through them attractive by focusing on user experience and expertly tailored product offerings. While their core business model is gathering user capital first and foremost, in order to compete, they need to offer good products that leverage DeFi. Building these diversified and risk-optimized products requires infrastructure that allows them to connect and customize access to the yield generators in the first place.
This infrastructure does not exist currently, even though we strongly believe that it would not only be valued by current DeFi users, but that its existence is a requirement for DeFi to continue on its current growth trajectory.
With Spool, we will fill this gap and provide infrastructure for the next trillion dollars in DeFi.
To find out how Spool is solving these problems, check our website, litepaper, and gitbook (work in progress) for deeper, more factual insights into what we are doing or continue reading the “blog paper” series here. (Part 1) (Part 2)
