Narratives driving crypto (Part 6 of 7): DeFi

We’ve already talked about some of the most recognizable narratives driving crypto in this blog series. But one of the strongest narratives that has institutional and retail investors alike banking on its story about the future is DeFi. 

The aspirations of DeFi as a financial sector can be umbrella-d under one big, overarching narrative: DeFi will take over TradFi (traditional finance). Beyond that, there are so many smaller narratives around and within DeFi that it would be kind of hard to sum them all up in one article.

The big themes are really what’s important when you’re considering how narratives move sentiment and motivate investment, though. So what’s the story that DeFi is telling the world about how crypto will change the future?

The overarching narrative 

If you’ve heard or read about DeFi at all, you’ve probably been told the overarching narrative that this incredible new crypto space has the capacity to disrupt TradFi. The story is driven by the idea that trustless P2P (peer-to-peer) financial transactions completely remove the need for financial intermediaries like banks, lending institutions, and other financial services. With blockchain and smart contracts, the middlemen who have held a monopoly on lending arbitrage can completely be cut out.

Anyone who is anti-establishment, whether their reasons are traditional or progressive, tends to agree that the banks and the government rob far too much wealth from the people who have no way to opt-out of the system. Bitcoin was created to exit the fiat game, but it is just a currency. The infrastructure of financial institutions providing services (for a fee) isn’t easily overturned with just a currency. That’s where DeFi comes in.

Rebuilding all the financial services that exist in legacy finance — but in a decentralized and automated way —is the dream of every person who has ever paid service fees, waited days for their transactions to be completed, or tried to convert assets. 

DeFi replacing TradFi is something everyone can understand, get excited about, and be motivated to act on. 

Increasing the market and yields

It’s not just average investors who are swept up in the DeFi narrative, either. Anyone who wants to earn a profit can see new wealth potential in the story of DeFi’s ability to break open new markets. One of the difficulties in TradFi is that financial services are permissioned, and that means a lot of people are cut out of the market because they don’t qualify. 

The “unbanked” as they’re called, are a huge part of the global economy who only deal in cash. If DeFi lowers the barrier of entry, gigantic new markets open up and wealth potential increases dramatically for everyone as more people participate in the global marketplace.

Plus, without the intermediaries snatching all the profits from every transaction, P2P services can increase benefits for both borrowers and lenders. The lender earns more yield on their capital and the borrower can get more competitive rates because fewer people are taking a cut. The promise of higher yields is probably one strongest of all the narratives driving crypto, whether in DeFi or any crypto sector.

Industry narratives

Some of the smaller narratives within DeFi are more industry specific. Anyone can understand how DeFi aims to cut out banks and increase yields for investors, but active crypto investors and enthusiasts are the ones who are motivated by specific industry narratives within DeFi. You can check out some of them by reading about upcoming DeFi trends, but here’s the gist of some.

GameFi

The story of GameFi is that play-to-earn games will earn people crypto in an easy and fun way while DeFi allows them to grow and invest their earnings. Merging gaming and finance may draw smirks at first, but the more you think about it, the more it makes sense in our culture and technological society. I mean, just imagine if your Neopets stocks were actually worth some kind of real value today!

Tokenized identity

With everyone concerned about digital privacy these days but unable to combat big data in a meaningful way, the promise of tokenized identity to access financial services and control all of your own financial information is extremely attractive.

DOAs

Decentralized autonomous organizations (DAOs) could almost have their own spot as one of the narratives driving crypto. But because they’re so new and most people, even crypto investors, don’t fully know exactly how they work, for now they’re better understood as an industry narrative within DeFi.

Can DeFi change the financial stakes?

Among the narratives driving crypto, DeFi is a very powerful one. It has influential people like Kevin O’Leary and Mark Cuban jumping on the crypto bandwagon. It also has institutional investors diving in with huge amounts of capital. But is the story of DeFi that promises to topple the legacy financial system a realistic one?

There are certainly hurdles DeFi will have to overcome to bring its dreams into reality. For one thing, the banks and governments definitely will not sit idly by as their golden goose is shot out of the sky. Regulators are coming for DeFi, and they won’t let up until the establishment can find a way to protect its interests. The question is whether DeFi can innovate fast enough to stay ahead of TradFi and regulators. 

Another roadblock for the DeFi narrative is in how fast it can scale. Scalability is a problem in crypto generally, but increasing trading volume also requires more liquidity. There’s also a question of improving bugs and user experience. If we really want to bank the unbanked, they have to be able to use dApps and protocols.

None of these problems are impossible to solve, but they are part of the counter-narrative DeFi will have to overcome in order to succeed.

How to invest in the narratives driving crypto

So knowing what a simple yet powerful story DeFi tells about how the people can take back control of their own wealth, how should you invest in the narrative? Certainly you can invest assets into the protocols and look for those kickass yields. But one of the best ways to position yourself to capitalize on the narrative is simply to participate. 

Use DEXs, experiment with lending protocols, participate in DOAs, support and use Web3 projects. Yes, of course, buy tokens, stake them if you want, trade, yield farm — get those awesome returns, you’d be crazy not to. But being a participant in the ecosystem will ensure that the narratives driving crypto will always have a place for DeFi.