At LendIt Fintech USA 2021, a leading event for innovation in financial services, Chainlink Co-Founder Sergey Nazarov joined Synthetix’s Kain Warwick, Aave’s Stani Kulechov and The Breakdown’s Nathaniel Whittemore for a virtual panel titled “How DeFi is Helping to Fundamentally Reshape the Fintech Landscape.” The conversation tackled three essential questions.
What is DeFi and how is it different from centralized finance?
Nazarov offered a short and sweet definition of DeFi: a restatement of all the centralized financial world’s products in a user-controlled, highly transparent format. Kulechov highlighted the permissionless nature of DeFi protocols that can be accessed and improved by anyone around the world, fueling constant innovation and DeFi’s mass adoption.
Warwick explained how permissionless, transparent protocols afford huge coordination gains without organizational overhead. “When you’re in fintech, you deal with these large organizations – they’re very opaque, they’re difficult to deal with, there are long sales cycles and negotiation processes to get anything done. In DeFi, you don’t need to talk to Stani to integrate something with Aave; you just turn up and you plug it in.”
How has DeFi grown from $1 billion TVL to nearly $85 billion TVL in just over a year?
“In DeFi, we have this growth hacking playbook that’s extremely powerful,” Warwick said. “It comes from the fact that when we have people participating in these ecosystems, they can actually get a portion of the network as payment for participating.”
Kulechov agreed. Because the DeFi ecosystem is open source, it’s filled with protocols “supporting each other and consuming each other’s infrastructure,” driving constant movement of liquidity and innovation in a “speed race” for the best efficiency.
How should traditional banks and fintechs prepare for DeFi?
Nazarov told the audience of fintech leaders it’s no longer a question of “if” but “how” and “when” traditional fintechs will need to transition to DeFi – and the answer comes down to user demand.
“There is a skepticism about blockchains, DeFi and cryptocurrencies that’s born out of a fundamental misunderstanding of how attractive this is to users.” He pointed to banks and fintechs scrambling to get custody of cryptocurrency now after dismissing it just a few years ago. His advice to those similarly discrediting DeFi is extremely straightforward:
“If the same guy who told you you’re never going to need custody of Bitcoins is advising you on the upcoming demand for DeFi, fire his ass. He doesn’t know how it works. He was wrong once, he’s going to be wrong again and you’re going to be behind in the future, just like you are now.”
One reason Nazarov believes people will demand DeFi is its superior yield. “A bank can give them 1%; on Aave they can get 8%. The only reason they’re not on Aave is they don’t know how to get on Aave. If you get them on Aave, that’s it.”
He described a natural cascade where users will want to own digital assets, then earn interest and use DeFi products like derivatives. In order to keep owning their user relationships, Nazarov said banks will have to keep giving users what they want.
“It’s not going to be a small percentage of their business. It’s going to be a big thing.”
Watch the full panel discussion below.