Augmentum’s Tim Levene and Ellen Logan spoke to Insider Intelligence about the disruptive potential of decentralised finance (DeFi).

 

“Since the beginning of the year, speculative behavior among retail and institutional investors alike has put the spotlight on cryptocurrencies. And while cryptocurrencies are currently the primary use case of blockchain technology, their growing popularity has piqued interest in other applications. Decentralized finance (DeFi) in particular has been touted as a more disruptive blockchain use case than Bitcoin in finance, per a Bank of America report.

DeFi applications offer a wide range of peer-to-peer financial services using software programs running on blockchains to create automated, enforceable agreements known as “smart contracts”—doing away with traditional financial intermediaries. Like the stratospheric growth in cryptocurrencies’ market cap, the total value committed through smart contracts reached $58.7 billion at the time of writing, up from $1 billion in February 2020. Meanwhile, VC funding in DeFi surpassed the $500 million mark for the first time in September across 34 startups. One of the latest investors to get involved is Augmentum Fintech, a £193 million ($247.5 million) London Stock Exchange-listed VC fund that allocated some of its resources in January to target DeFi startups through an investment in ParaFi.

Insider Intelligence spoke with CEO Tim Levene and investor Ellen Logan at Augmentum Fintech about why DeFi is one of the fastest-growing sectors in crypto, how it could disrupt traditional financial services, and what barriers to adoption remain.

The following has been edited for brevity and clarity.
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Insider Intelligence (II): What do you think caused the explosion in crypto investments we saw this year?
Tim Levene (TL): I don’t think you can deny that the pandemic has had a major effect across a number of dimensions. For one, the amount of government stimulus across the world has created the threat of inflation, making people look for an alternative to cash—like gold or crypto—as better stores of value. Two, the first meaningful signs of institutional buy-in have created an enormous catalyst in the crypto space as well. The likes of JPMorgan provided validation for many of their peers that were still sitting on the sidelines. And as more asset managers and hedge funds start to participate in a very significant and meaningful way—all of a sudden, you need the infrastructure around that. This is fueling demand for heavily funded crypto infrastructure players to sustain an industry that is moving far beyond the niche that it occupied some time ago. You’ve also had crypto funds that have generated huge returns recently, and they’re just reinvesting it back in the ecosystem and fueling more crypto projects.

II: Why are you allocating funding to DeFi?
Ellen Logan (EL): We’ve seen some of the centralized crypto exchanges with fairly traditional business models and consumer-facing operations now starting to dominate the American and European markets. But when those companies were at the A and B rounds that we would have invested in, it was not necessarily clear to us where the differentiation would come and who would win out. But with DeFi, we are seeing propositions that have truly fundamental differentiation. There’s the chance now to invest in teams building brand-new infrastructure layers in DeFi, that we believe could grow and in time become more of the back end for financial services. We are really interested in this opportunity and in companies building other types of infrastructure to support growth in the digital asset space, like institutional trading solutions, data companies, and more.

TL: We’re looking for those standout market leaders who are really one, differentiating, but two, disrupting, and in many respects, that ship has sailed for more conventional crypto projects. The land grab has happened. And it’s clear, or it’s clearer, who the big winners are going to be. But there’s still a long way to go—far beyond crypto exchanges. I think that’s where we really want to focus.

II: Why do you see DeFi as one of the fastest-growing and most exciting spaces in crypto?
EL: I think DeFi is really an exploration of how we could rebuild things, and the tools and community are already there. A lot of people are attracted to build in that space because of the way it’s set up: it’s an open-sourced environment with less regulatory scrutiny—for now. Developers see the potential to build and launch something far more rapidly than in the more traditional world and build something that the community values. So I think that will continue to keep up the pace of development in DeFi.

II: What are the benefits of DeFi for mainstream financial systems?
EL: We frame DeFi protocols as infrastructure software. And if we think just about tech, generally, software is disrupting every industry, and financial services are no different. But DeFi disruption goes many layers deeper, rebuilding some of the fundamental areas of the financial services stack. Smart contracts are a powerful technology; in many ways, they’re the “perfect contract,” executing without the need for manual intervention if and only if required conditions are met. This is why they can perform the role of an intermediary in a financial transaction and also why they’re so scalable. Obviously, there’s still a lot to play out in terms of how much DeFi back end can permeate the mainstream financial services world, but we think the potential is there and that DeFi can be the most efficient way to manage these services.

II: What do you foresee as the main barriers to DeFi adoption?
EL: We’re still a long way from having great fintech-esque user experiences in the world of DeFi. So I think what we expect to emerge are more fintechs that will manage a consumer-facing front end and have a DeFi-powered back end. This will hopefully help solve both the user experience challenges and regulatory hurdles such as who bears responsibility for noncompliance. It’s also about bringing regulators on board with the potential to monitor the space and figuring out the systems that will let them do that.

II: Which type of financial services do you think will be first to adopt DeFi?
EL: Most of the institutional activity we see today is going through the centralized exchanges and is focused around trading, but there are some really interesting DeFi projects where we could see different types of bridges built between DeFi and the traditional finance world. Insurance is one of those; for example, a project like Nexus Mutual has built up pretty significant underwriting capacity, and while primarily insures risks within the digital asset space today, their future asset pool could be used to underwrite more traditional and familiar risks like health or motor.”

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