Decentralized finance - yet another solution looking for a problem, truly the future of finance, or something in between? Let's have a sober look under the hood of a crypto enthusiast's darling industry and try to assess whether the buzz warrants VC attention in 2021 and beyond.
If you work in the industry, are an enthusiast, or are just curious about the space, reach out to us over at HEC Alternative Investments Society for any activities with or at HEC Paris, the business school, or reach out to me personally for any other comments.
Decentralized finance can be somewhat of a slippery term to grasp. I'd say the most fit for purpose definition is the one that industry newssite Binance offers:
"DeFi may be defined as the movement that promotes the use of decentralized networks and open source software to create multiple types of financial services and products. The idea is to develop and operate financial DApps [Decentralized Applications] on top of a transparent and trustless framework, such as permissionless blockchains and other peer-to-peer (P2P) protocols."
I'd add that DeFi application are, by default, run on decentralized ledger technology. Contrary to popular belief those applications can be, but are not limited to, blockchain infrastructure. Besides mirroring existing financial services, DeFi applications are increasingly targeting novel use cases.
In theory, DeFi applications utilize the inherent capabilities of the underlying blockchain infrastructure - although objectively, some of those advantages do not materialize in this current iteration of the market: