DeFi blew up in the last year and a half. But, as debates about the sustainability of Yield Farming take off, we’ve started looking a bit farther into the future. Changes in the sector are inevitable, and we looked into how moves toward mass adoption will affect Decentralised Finance. We explored this in our most recent report, “Decentralised Finance: Usecases & Risks for Mass Adoption”.

Joel John, an independent blockchain analyst from India, wrote this report. He has extensive experience in this field, having collaborated with Metacartel Ventures, Encrypt, and Alkemi,in an advisory capacity.

His knowledge also comes from his work on a research fellowship exploring a blockchain-based identity network for the gig economy in India.

He has also worked with UK-based Outlier Ventures and Rebright Partners from Tokyo.

We had the chance to delve a bit deeper into some of his knowledge, and in particular, some of his predictions for the future of DeFi.

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Hi, Joel, thank you so much for not only writing the report, but then taking the time to hash out some of the finer points with us.

To start, in the beginning, big institutions shied away from blockchain, but that’s starting to change. So, how do you expect this shift toward larger enterprise will happen, and what will it change in the DeFi sector in the next 5–10 years?

I think the history of finance is such that in order to have legitimacy it needs to be able to gradually grow into something much larger. And when that happens, inevitably both governments and institutions begin to get involved because, if they don’t, the risks that stem from these financial instruments could affect a very large share of the citizenry. We saw that with the stock markets being regulated in the US in the 1920s during the retail frenzy, with money going digital in the 1980s in the form of ATMs and then in the early 2000s when the internet changed how we perceive money.

My bet is on the fact that over the next decade, De-Fi as a concept will become more abstract and we will think of it purely as finance. The end user will not even know there is a blockchain at the other end of it and continue to interact with these financial primitives as though it is running on traditional financial rails like SWIFT. Regulators will inevitably be required to be involved to (i) win consumer confidence and (ii) ensure bad actors are punished as this ecosystem evolves.

So the key changes I see are the arrival of government and enterprise actors clubbed with regional FinTech apps playing crucial roles. When Facebook and Google took off, the ecosystems in SEA and Africa were not as developed. With both technical skills and internet penetration rising substantially two decades later, my conviction is that it will be home-grown DeFi apps that begin to capture regional markets due to the higher trust associated with a founder being from within the region. The internet has not entirely transcended cultural boundaries yet.

You also brought about the prediction that the Big Four — Deloitte, PwC, EY, and KPMG — will become an essential part of the DeFi landscape. Why will this be, and will they have the necessary knowledge to keep up with the rapid innovation in the sector?

The Big Four have been looking at the space judging by their research publications on stablecoins. It is also likely that their existing clientele have asked them about using DeFi based instruments for general purposes like cross-border payments. However, given the pace at which the industry evolves, it is unlikely that their existing teams have the know-how on how to cater to what clients may need. More importantly the hiring in these traditional organisations are not optimised to capture talent in emerging technologies.

My understanding is that much of the skills gap will be met through acqui-hires. We are seeing this happening already with taxation related softwares being acquired strategically by the Big Four audit firms to help their clientele with tracking blockchain data. We will soon see this expanding to more exotic use-cases such as yield tracking and lending rates. While the Big Four may not have the necessary talent-pool currently, they do have an excess of resources handy and this could be used extremely strategically to help ensure they catch up with the changing needs of the industry.

FinTech is of course already the faster moving sector of finance. How do you foresee acceptance of DeFi and crypto, and do you foresee a gap emerging in how FinTech giants will adopt these innovations?

I see traditional FinTech platforms, like Paypal and Revolut, playing a critical role in the adoption of DeFi based applications. A key reason for this is that they have the distribution channels required to take these applications to large bases of consumers. We are seeing this happen with the content market already. Both Twitch and Reddit have some form of cryptocurrency integration either to reward user behavior or to enable payments.

More importantly, from a FinTech point of view, Paypal and Revolut have already been in talks with stablecoins businesses to explore synergies. My understanding is that the initial focus will be on the use of stablecoins for remittance. From that access point, these businesses might also enable the trade, storage and use of non-fungible tokens in consumer applications, such as gaming or event tickets.

The gap will likely be wider in regions where the regulators don’t play a strong enough role. In these markets, FinTech players will have a good incentive to ensure the markets don’t open up for newer entrants, and thereby protect their own monopoly.

Of course, like you mentioned, many expect that DeFi will see greater adoption through acceptance into older, legacy service providers. But, what will traditional financial institutions and FinTech giants bring to DeFi? Both good and bad?

I think the biggest gap traditional FinTech applications solve for is distribution, as mentioned earlier. More importantly, the key challenge they will tackle is legitimacy in the eyes of the customer and the regulators. When a small scrappy startup with nothing to lose suggests stablecoins are a better way of sending money around, a regulator may not buy into the argument. However, if you send in a multi-billion dollar FinTech entity with multiple large backers, the tone changes as they have much more to lose. That air of legitimacy will not bring in customers alone, but also talent and associated services, such as custody and on-ramps.

The downside is these FinTech platforms could very well be against the ethos of truly “decentralised” finance, as they could become gate-keepers of sorts. Much like how Facebook, Google and Amazon have substantial authority on the nature of content we consume and what is determined to be “news” — FinTech applications becoming the medium of distribution comes with the risk of them determining what will find massive adoption. Platform monopolies can become a risk with DeFi applications being discovered.

Ya, it seems that everyone is more or less resigned to the fact that mass adoption will degrade decentralisation and the democratic ethos that still surround DeFi. To this end, do you expect to see greater entry barriers for founders? And, if so, will innovation also slow?

The key differentiator for teams going into the 2020s will be how regulators see the DeFi ecosystem. Forward leaning FinTech ecosystems, like those in London, Singapore and Switzerland, have good incentive to maintain a liberal view on how they regulate the ecosystem. However, they are not the largest markets for these applications.

The leap-frop moment in finance is likely going to happen in India and different pockets of Africa. These are unfortunately also regions where bureaucracy and government processes make it harder for technology-based innovations to be executed quickly. This is the biggest barrier for entry. In the short run, this gap is filled by venture capitalists and consumers that are willing to invest in, or use, applications that are built by founders from halfway across the world. When this does happen, we may likely see innovation stagnate for a bit.

My bet is on bodies like the IMF and WEF issuing guidance for member nations to take a more nuanced view on the ecosystem, instead of making decisions on hysteria and fear. This is where engaging with regulatory bodies will be quintessential for the industry to be able to move ahead.

Great! Thank you so much, Joel, for everything. As always, your input is very insightful, and it will be interesting to watch how this all unfolds.

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