Missing Layers: Defi Yield

On the Crypto Conversation, co-founder of ChainLink Sergey Nazarov suggests that meme stocks — like GameStop — have reminded retail investors that the financial system was built to favor insiders and proves that they are eager to adopt financial services and investment strategies through DeFi that put them in control.

From a retail perspective, I see two significant intellectual leaps of faith here:

Switching costs are real. while it’s true that any investor would prefer an even playing field, how many consumers are willing to dedicate the time required to i) education themselves on new technologies, ii) learn to manage their own private keys, and — most importantly — iii) make their own investment decisions? As we’ve seen in retail investing, banking and payments over the last 15-20 years of FinTech, consumers choose the path of least resistance, and habits die hard. (What percent of your friends and family rely on a robo or financial advisor to make investment decisions?)

Looking out over the next 12–24 months, the population of retail investors dabbling in DeFi to chase yield should remain largely immaterial relative to existing investment channels. Interest in the space, however, will continue to grow in today’s low yield, inflationary market. All investors will remain focused on chasing yield. DeFi can be an answer, but not before a robust services layer can connect market demand for yield with DeFi protocols.

Unlike early days of speculative trading in crypto, institutions will lead retail in DeFi. The foundation for a DeFi services layer is growing rapidly to support institutions. As laid out by Consensys, institutions need access to an exchange, an iron-clad custody program, services to monitor investment opportunities, methods for reporting and tools to ensure adherence to compliance rules.

In parallel to these services being developed, regulators and in-house compliance teams will have more time to sift through domestic laws, regulatory frameworks, and tax rules — all fundamentally critical components to main-stream adoption of DeFi for both institutions and retail investors. Clear rules, and a services layer that incorporates this guidance, unlocks the DeFi ecosystem that Sergey is working to build.