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Messari at Hangzhou International Blockchain Week | DeFi is Eating the World

On July 5, the Hangzhou International Blockchain Week 2020 held by 8BTC has kicked off under the guidance of local government.

Started by China’s leading blockchain and crypto news media 8BTC since 2017, Hangzhou International Blockchain Week is an annual event series that brings together the most influential industry leaders, investors, thought leaders and medias of the blockchain industry with their insightful talks about the industry.

The conference is deemed as the largest and most influential blockchain conference and crypto event within China. Following the country’s president’s blockchain endorsement and inclusion of blockchain into the “New Construction” plan, this year’s blockchain week is themed “Embrace the New Wave”.

As one of the most talked about topics in the crypto realm since entering 2020, DeFi has spiked in popularity and it’s becoming apparent with the performance of the sector’s leading tokens like Maker, COMP and BAL. Ryan Selkis, cofounder and CEO of crypto research firm Messari, was invited to deliver an online speech centering on the recent heatedly discussed DeFi.


Below is the full text of Ryan’s speech.

Hi everyone, thank you for having me. My name is Ryan Selkis. And I’m the founder and CEO of Messari, a crypto asset research and data company based in New York. We’ll talk a little about DeFi today.

What is DeFi

Maybe for starters, I should give you my opinion on the very term DeFi, decentralized finance, which I believe actually implies to the entire crypto realm. Because really what we’re trying to do is decentralized financial services.

Obviously, bitcoin was first and it was a foundational part of this decentralization efforts starting with money and the superior digital store of value and transparent ledger for payments and other transaction reconciliation.

And then more recently, Ethereum, which really is a crypto evolve to capture most of what we consider modern financial service. That would be things like decentralized exchange, lending, new synthetic asset issuance, ICOs and token sales or some of the first. But now we’ve seen things like digital goods and non-fungible tokens on chain instruments like derivatives and loans, insurance products.

The things that right now most people are referring to as DeFi are really accelerate and pick up steam in recent quarters. And you can really think about all of crypto finance today is that what we’ve done purely through code on a decentralized basis. Even if it’s not yet done at scale and even if there are centralized services that currently handle some of those similar products, like exchange, like lending and others.

Regardless, I do think that as a catchall term, it always starts with some definitions. And I assume that most people that are watching this presentation are very in tune with the goings on in the broader cryptocurrency industry. Some of you might be newcomers. Some of you are probably a little bit more advanced. But nonetheless, you recognize that there is more to the crypto realm than simple payments and simple speculation. And now there are bona fide opportunities to actually to earn network fees by participating in these open financial protocols.

DeFi trends for 2020

There’s been a lot of activities recently. Decentralized exchanges are from five times in volume since the beginning of the year. Last year it had grown five times throughout all of 2019. If you look at the lending markets which were basically nonexistent in early 2018. There now multibillion-dollar markets are run by some of the largest OTC desks. So the lending protocols have now eclipsed about 3 billion in total market capitalization. If you think about insurance products, again, nonexistent for on chain instruments. Now we have products like Nexus that are actually ensuring users against catastrophic losses due to bugs and smart contracts that could be powered using some DeFi protocols and applications. And the list goes on and on.

But really what we’re talking about is the continued experimentation with a new set of protocols that is ultimately going to, I think, the majority of not only centralized crypto financial services, but also financial services in general. The ideal in 15-20 years, the world that we’ll look at will be protocol driven. It might be interactable, make stem across different protocols, might not necessarily be bitcoin that wins, might not necessarily be Ethereum that wins, But there will be an interoperable web of protocols powering decentralized financial services for the long term. I don’t think that vision has really changed in the last four or five years, But it feels much more real now, even though we’re still in the very earliest experimentation phases than it did maybe even a few years ago.

So I do wanna, maybe kick off with a set of predictions that we made earlier this year at Messari. If you look and in search for Messari DeFi trends for 2020, you can find a list of these that you can review at a later time. But I wanna talk about what we wrote in December and where we are today.

So number one, our first prediction for the DeFi market going into 2020 was that Maker and Make Foundation were no longer the end all and be all for DeFi. MakerDAO has been phenomenally successful at ushering in the programmatic stablecoin movement at pioneering the concept of collateralized debt positions that could be completely run on chain using one or multiple crypto assets as collateral. In fact, we saw that last year MakerDAO led much of the growth in terms of total value locked in DeFi, doubled from 250 million first half of last year, 500 million towards mid part of the year.

And then other protocols, like Synthetix, like Compound, started to make their entrance. And now, of course, some of the dominance components of the DeFi ecosystem, compound especially even last week since it launched its token really pioneering this concept of DeFi farming and yield farming. So I’d expect to see some aggregation and some power law distribution around the dominant platforms. whether that’s Maker whether that’s Compound or Synthetix or something new comes along, but I think the most important things to watch early on some of these protocols are the network functional. And as it built a healthy ecosystem of connected applications that could serve as a Schelling point for the broader project, give people conviction. This is where liquidity ultimately will aggregate.

And then to as compound should next week, do they have a credible path as they go to market to actually capitalize on these tail winds and DeFi more broadly. But earn users and win users early on are those incentives to provide liquidity and Compound were perfect example. We’ve seen this with Balancer as well. And I’m sure want to see this with additional incremental protocols that launch their governance tokens that also have some capacity to serve as a claim on assets and network fees that underpin these decentralized finance protocols.

The second component that we’d written about at the end of last year was around Synthetix protocol, synthetic assets. Its volumes grew from less than a million in August to over 10 million in December. It is now multiples of that. It is the second-largest DeFi protocol in terms of assets locked total value locked. It continues to grow very fast, in large part because it has really opened the door to all types of synthetic on-chain instruments, not just stablecoins, but any type of digital commodity.

Ultimately, we think it will pave the way for all sorts of synthetic securities and mirrored instruments that might actually have to interact with or replicate the returns of real world as it listed on a domestic exchange. It’s excited about Synthetix, for many of you are excited about is the potential to not just rely on the exchanges that you have access to within your country for returns on equities, but instead be able to at least capitalize on the potential returns that these equities would offer.

If you were ultimately able to invest in US based company from China, for instance, where vice versa, or if you are in India and then you are trying to invest in mushroom company, are synthetics in some of the newer synthetic asset creating protocols finally open up this opportunity

And the growth has just been staggering for obvious reasons. Because the traditional equities markets are many many multiples of what the current crypto market is. And there is a ton of demand for real world equities and equity like exposure to folks that are trying to get international exposure and diversification to their portfolios. That might be especially important now as we see a rise in nationalism, as we see a bit of deglobalization as a result of the coronavirus, the synthetic assets might be one of the few ways to actually get the correct amount of exposure, as access points get shut off between different countries and investors start to be forced to work within their own countries and their own economies for investments.

The 3rd thing that we wrote about was we called not so DeFi. DeFi might be better described as open finance. Decentralized finance is bit of a misnomer as most people would agree right now, because many of the current leading protocols are still very much centralized. I think in five years we will see a healthy chunk of decentralized finance protocols truly managed by a multi party ecosystem, potentially through distributed autonomous organizations or some other type of stakeholder voting mechanisms.

Today, though, by and large, most of these teams are still centralized. Most of the critical development is happening inhouse at the initial token creators, and that’s okay because everything has to start centralize. The same thing happened with bitcoin. In the early developer Satoshi and some of his early colleagues were the only ones to work on the protocol for the first year couple of years. The fact of centralization to start Ethereum is no different with the Ethereum foundation. Obviously it is become much more widely accessible and is no longer just about the theory foundation in terms of making developments upgrades to the Ethereum protocol

We think the same thing’s gonna be true for DeFi over the long term. But better beware that early on these teams and these projects have token treasuries that ultimately are being actively managed and distributed and ultimately sold off to a more broad ecosystem of potential stakeholders. So you always wanna look at who’s got the money, who got the tokens and ultimately who has governance control effective governance control over these different ecosystem.

There’s a fourth component that we wrote about this has to do a little bit with systemic risk. Super fluid collateral is one term that was used to describe the layering of different onchain derivatives and the fact and reality that some collateral that is locked in decentralized finance applications can be used as collateral in multiple applications simultaneously. It’s gonna be very very difficult to actually track this down.

And understand just how far down the rabbit hole goes when it comes to the potential liquidation risk and the cascading liquidation risk that some DeFi protocols might ultimately experience if individual investors are able to use the same ETH, for instance, to back a Maker cdp and then also able to use that same ETH to back where that collateralized debt position to DAI from that to ultimately invest in a leveraged bet on a synthetic asset through a protocol like Synthetix.

You’ll notice throughout this presentation, by the way, I’m referring very frequently to western projects, the ones that were more familiar with, but ultimately hope that you’ll be able to make the extension to some of the other protocols that might be more popular in the east. Although I’m sure most of these are gonna be relevant regardless of which geography we’re talking about, because they are the largest so far to date.

In any case, given the risk of systemic DeFi failures, it might be in the best interest of anyone that’s starting to not only invest personally, but ultimately build with these ecosystems, to think about how we’re going to use that different hedging tools and how they might be able to learn on insurance to their applications or to their portfolios, in the case of some type of catastrophic bug, which we’ve seen repeatedly through many of the top DeFi projects early on this year. In February, there was three separate major depletions of total contract deposits that were exploited, some of which were ultimately reconciled and returned to the protocol teams.

But regardless, the top thing that I would be focused on if I were building a DeFi application and actually plugging into all the different early stage experiments and moving parts of this ecosystem would be how to flip a kill switch. And ultimately, edge browser exposure to some of the systemic risks that are prevalent throughout the DeFi ecosystem. That has not changed.

In fact, some of the risks that we pointed out last December came to a head very quickly in February. That’s to be expected. But buyer beware and builder beware when it comes to actually developing these applications

The 5th thing that we wrote about in December was what we call the departments of DAOs. And this refers to decentralized autonomous organizations. The original DAO had a grandiose vision of something can do a leader list investment firm for the people. And we saw in late 2019 resurgence of much smaller careful experiments in DAO design like Moloch like MetaCartel and like other marketing related DAOs that were specifically geared towards giving a group of stakeholders some say and how donation being allocated across an ecosystem like Ethereum.

Ultimately, I think we are most bullish on DAOs as investment vehicles that will then select investors and partners on their behalf to go and invest either infrastructure companies or other experimental protocols. And the way to think about this is the difference between a limited partner and the general partner using the venture capital model.

I think that ultimately the concept of community votes for different investments is going to be fraught with issues. Instead, what this could be very very beneficial for our investment managers, particularly niche investment managers that might want an easier time of raising money for their own micro funds that they can allocate over time.

And you might have a number of specialists that ultimately emerge that are able to really pick up the capitalize on the benefits of this much easier investor fund raising mechanism and still be methodical about how they’re choosing their investment

So these are a few of the top 10 themes that we identified for 2020, you can absolutely check out the rest on Thank you very much for inviting me to speak.

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