Finance Disrupted: Decentralised Finance and its Implications for Fintech

Alvin Kho

November

2021

Q2 of 2021 seen investments upwards of US$14 billion into crypto, but why?

In the second quarter of 2021 alone, venture capital investment into cryptocurrency (crypto) and blockchain startups came up to US$14 billion^. This represents a 23.33 times growth over the same period last year, where only US$600 million was raised.

Fuelled by the gradual mainstream adoption in the form of El Salvador’s bid to make Bitcoin its legal tender on 9th June 2021, as well as the launch of the first US Bitcoin ETF (BITO) on 20th October 2021, and, most recently, on the 2nd November 2021, the Monetary Authority of Singapore (MAS), which regulates banks and financial firms, having expressed its intention to become a leading player in the global crypto economy, it has become apparent that crypto and blockchain has become too large to ignore.

Crypto Tech
The technology behind cryptocurrency, which centres around the peer-to-peer network called blockchain, is an open distributed ledger that records transactions between parties efficiently, and can be validated by a select or public audience. The unique feature of blockchain is decentralisation – nobody is in charge of it, and it is collectively run by its users.
Decentralised Finance, or DeFi, is blockchain-based finance that does not rely on central financial intermediaries. Examples of such are most traditional institutions in finance: banks, brokerages and exchanges. Within DeFi, orders to buy and sell are self-executing via smart contracts, without the need for a central authority.

Enter NFTs
Non-fungible tokens, or NFTs, experienced a surge in popularity where over US$2 billion was spent on NFTs in the first quarter or 2021*, a 2,100% growth over the preceding quarter.
NFTs created a new asset class, as these tokens allow for the identification of items or products by minting it with an exclusive cryptographic serial number; essentially creating a unique, one-of-a-kind digital asset.

The implication of NFTs within the video gaming industry is massive, with crypto games such as CryptoKitty taking centre stage early in mainstream news coverage of NFTs. Players are able to buy, breed, and trade digital cats on the platform which has seen over US$30,000 in transactions.
Larger game developers like Atari and Sony are also looking to cash in on the NFT space, with the former planning for its Atari blockchain division to tie NFTs into its retro gaming, and the latter planning for a mainstream game release called The Six Dragons on the Ethereum blockchain. EA entertainment’s CEO, Andrew Wilson, expressed an opinion that blockchain and NFTs in games is the future of the industry.
Similar to the trend with cryptocurrency and blockchain startups, venture capital has also been unable to ignore the NFTs space, with Los Angeles based NFTs games startup Mythical Games securing a US$75 million funding round on 11th June 2021, and Meta4 Capital creating a US$100 million fund to invest in NFTs in October 2021.

Research by the Bank of New York Mellon Corporation showed that venture capitalists such as Dapper Labs, Genies, OpenSea, Bitski, SuperRare, Rarible, Mintable, and Sweet.io, are investing in NFT marketplaces in Seed to Series B rounds, with over US$483 million in funding within March to June 2021.

Limitations of DeFi
DeFi systems have mostly only been used within the crypto community, since it trades exclusively in digital assets, which limits its adoption by businesses which do not possess said digital assets.
In addition, DeFi transaction protocols are still at a development stage, whereby to date, a large majority of DeFi transactions take place on the Ethereum blockchain. Due to the complexity of DeFi protocols, many industry insiders are of the opinion that the eventual “global-adoption ready” DeFi protocol is yet to be seen.

What does it mean for Fintech?
The Covid-19 pandemic resulted in the lives of many becoming increasingly digital. In a breaking move, Facebook CEO, Mark Zuckerberg, announced that Facebook is rebranding to “Meta” on 28th October 2021. Mark Zuckerberg intends for the former Facebook to develop the metaverse – the shared online 3D virtual space.

Investors showed approval for Facebook’s rebranding, where the company’s shares had surged 5.5% within 5 days of the announcement.

Meta, which owns four of the top six social media platforms, as well as Oculus, which manufactures VR hardware, appears to hold a valuable position in making the metaverse a reality. Similarly, Microsoft has an operating system (Windows), servers (Azure), communications network (Teams), hardware (HoloLens), entertainment hub (Xbox), and social network (LinkedIn).

Within the distant metaverse, digital currency, in the form of cryptocurrency, as well as digital assets minted by tokens, in the form of NFTs, would likely be pervasive.

The implication for a perpetually virtual world is the need for finance and fintech alike to keep up with the changing times. While existing fintech companies attempt to disrupt traditional finance, cryptocurrency and blockchain technology attempt to almost entirely overhaul it. Nevertheless, it has to be said that the rise or fall of DeFi is something the world can only wait to witness.

^ Source: Pitchbook
* Source: nonfungible.com