Thoughts on the State of DeFi

Apr 08 16:04 2020 Print This Article

The last couple of weeks have been quite a test for cryptocurrency markets in general and DeFi in particular. On Black Thursday (March 12), BTC/ETH prices declined by ~50% and DeFi’s flagship project, MakerDAO, ended up with ~$5 million USD in unbacked DAI. You can read Tom Schmidt’s excellent postmortem of what happened here. This event was a powerful reminder that while DeFi is extremely exciting in the long-term, it’s still very much in the early adopter experimental phase. I see at least three main challenges for DeFi to overcome in its quest for mainstream adoption.

1. Scalability

The most obvious challenge that Maker’s struggle highlights is the need for orders of magnitude more throughput on whatever blockchain, sidechain, or layer 2 solution that DeFi ultimately gets built upon. While Ethereum’s current block size seems suitable for most use cases most of the time, on days when markets panic and liquidations occur, we can expect at least an order of magnitude more transactions competing for finite block space. It’s more or less the same story we saw with CryptoKitties back in 2017. A promising use case with insufficient infrastructure. Perhaps Ethereum 2.0 will end up solving this problem at the base layer. Or perhaps a new layer 1 like Near will emerge. My bet, however, is that a sufficiently decentralized layer 1 blockchain will never be able to handle massive usage spikes on days when 7+ billion people are using DeFi. And that’s the ultimate goal. I’m therefore very excited to see more experimentation with DeFi apps built on layer 2s or sidechains.

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Version One is an accelerator for innovative start-ups with a fresh approach to solving important and difficult problems. They invest in category leaders that leverage network effects to build a defensible product. Version One has invested in over 50 internet companies such as Frank and Oak. Angel List, Booster, and more.

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