DeFi Opportunities and Challenges in the Current Crypto Market

DeFi and the New Composition
of the Crypto Market
Changes, challenges, opportunities of the next wave of DeFi innovation.
Jesus Rodriguez
IntoTheBlock

DeFi and the New Composition of the Crypto Market
Agenda
● DeFi and the current market dislocation
● Practical challenges and opportunities
● New product ideas

New Live Customers
Swype

New Indicators
● Dozens of new indicators were
added to the platform

Upcoming Releases Before the End of the Year
● Cardano analytics
● New suite of indicators
● New release relate to DeFi risk monitoring

⚠️ Controversial idea ⚠️
The crypto market is experiencing a once-in-a-
generation dislocation

Existential Challenges to the Current Crypto Market
Vacuum in Financial Capabilities
Many fundamental primitives of financial markets are operating in very limited capacity
Small Number of Participants
There has been a disproportionate number of crypto financial services providers that have collapsed
Trust
Trust in centralized crypto institutions is at an all-time-low
Barrier of Entry
The entry point for new participants in the crypto ecosystem is very high and complex

Credit
Market
Making
Lending
Stablecoin
Supply
Funding
Environment
Volumes
and
Activity
Diving Deeper Into the Damage

⚠️ Obvious idea ⚠️
The current market dislocation creates a unique
opportunity for DeFi to shine…

DeFi can be the ultimate beneficiary of the
current market dislocation, but the specifics
are far from trivial…

DeFi is Hurting Too
Many large
participants in DeFi
have collapsed
TVL has declined
drastically
Entire DeFi
ecosystems have
collapsed
Many protocols only
work based on
incentives

DeFi CeFi
An Annoying Analogy: The Crypto Enlightenment

It’s DeFi’s moment to shine!
But how?

⚠️ Suggestion ⚠️
Avoid trivial answers…

The Answer is Not…
Regulation Better On-Ramps Better UX Better Yields

Biggest, Non-Trivial
Challenges/Opportunities in DeFi…

Key Areas that MUST be Solved in DeFi
Credit Capital Efficiency Bridges Risk Management
Insurance Organic Yields Real Utility TradFi Bridges
Missing Primitives
Thoughtful
Regulation
And More…

⚠️ Controversial Idea ⚠️
Without solutions to the majority of those
elements, DeFi will remain a second-class vehicle
in the digital asset space

Credit
The Challenges
● Credit in DeFi is fundamentally
overcollateralized
● Undercollateralized options have focused
on lending to market makers
The Opportunity
● The stress in large lenders like Genesis
have created a massive opportunity for
credit solutions built on DeFi rails

Predictable On-
Chain Lending
Lend to projects with predictable outcomes on-chain
Robust Underwriters
Bring world-class underwriters to structure the lending
terms using DeFi dynamics
Building a new generation of undercollateralized, semi-collateralized lending
protocols on DeFi rails
Interesting Ideas to Explore

Capital Efficiency
The Challenges
● Passive AMMs are a transparent but
incredibly inefficient model for capital
formation
● Lending in DeFi is fundamentally
overcollateralized
The Opportunity
● Volumes and trust in CeFi venues is at a
multiple-year low

Hybrid AMMs Platforms that combine order-book and AMMs models
Leverage
Vehicles that provide thoughtful leverage to activity in DeFi
protocols
Building protocols natively targeted to improve capital
efficiency in DeFi

Bridges
The Challenges
● There are too many bridges in DeFi and
too many of them have been vulnerable to
exploits
● Many bridges require trusted models and
are very slow to operate
The Opportunity
● There is massive alpha opportunities that
can be captured by providing seamless
cross-chain interoperability

Extensible Bridges
Enable incentives for the top bridge platforms in the market
to incorporate the majority of blockchain runtimes
Cross Chain
Financial Products
Build native protocols that focus on exploiting cross-chain
financial asymmetries using bridges
Consolidate the effort on a small number of trustless bridges

Insurance
The Challenges
● Insurance models in DeFi remain mostly
gamified protocols at a small scale
● DeFi Insurance is mostly focused on
technical exploits and not on economic
vulnerabilities
The Opportunity
● There is a massive demand for insurance
models in DeFi protocols

Position-Specific
Insurance
Develop insurance models to protect specific trades, not
protocols
Economic Insurance
Protocols
Enable programmable interactions with insurance policies
via a DeFi protocol
Build economic insurance models for DeFi protocols

Risk Management
The Challenges
● Risk management products in DeFi are
mostly focused on smart contract
protection
● Economic risk in DeFi protocols changes
regularly due to market activity
The Opportunity
● Risk management in DeFi is one of the
most requested capabilities by large
institutions

Real time Economic
Risk Monitoring
Develop platforms that monitor and detect risk conditions
in DeFi protocols
In-Protocol Risk
Management
Embed native risk management controls in DeFi protocols
Make risk monitoring a native component of the DeFi ecosystem

Organic Yields
The Challenges
● Yields in the first generation of DeFi
protocols have been disproportionally
based on incentives.
● Many of the incentives were not tied to
activity in DeFi protocols
The Opportunity
● The asymmetries in DeFi creates a very
fertile ground for market neutral yields

Cross-Chain
Asymmetries
Capture organic yields that target asymmetries between
DeFi protocols on different blockchains
Real World Utility
Produce yields by extending lending or credit vehicles to
real world projects
Enable constructs that foment organic yields in DeFi ecosystems

Real Utility
The Challenges
● Most applications in DeFi are focused on
financial primitives
● Many DeFi protocols have no real utility in
the ecosystems
The Opportunity
● Attract a new set of participants to DeFi by
creating real utility

Gaming
Many DeFi primitives can be used to streamline financial
activity in games
X-to-Earn
Build automated financial constructs that compensate
users for performing specific activities in the real world
Build use cases with real utility on top of DeFi rails

TradFi Bridges
The Challenges
● DeFi remains, in vast majority, a crypto-to-
crypto market
● Yields have been the main dimension to
catalyze growth in the DeFi space
The Opportunity
● The pressure in the macro environment
has created a window to expand the utility
of DeFi onto traditional financial services

Credit-Lending
Expand DeFi protocols to participate in loans issued to real
world business
ETPs
Build exchange traded products that expose DeFi to public
market investors
Integrate DeFi utility into traditional financial services

Missing Primitives
The Challenges
● DeFi today is based on two fundamental
primitives: market making and lending
● The space remains incredibly constrained
in terms of financial use-cases
The Opportunity
● New financial primitives can capture a
significant market share in DeFi

Derivatives There is a growing market for efficient DeFi derivatives
DeFi-Only Primitives
Build mechanisms such as flash-loans that are only
possible in DeFi
Build new financial primitives that complement market making and lending

Thoughtful Regulation
The Challenges
● DeFi has remained mostly an unregulated
market
● The lack of regulation prevents DeFi from
expanding into other markets and might
trigger regulatory enforcement that harms
the space
The Opportunity
● Building the key components to enable
non-invasive regulation in DeFi

On-Chain
Regulatory Scores
Analysis of on-chain pools to determine their compliance
with regulation
KYC-AML Incentives
Native incentives in DeFi protocols to foment KYC-AML
compliance
Enable building blocks that bridge DeFi and regulatory financial products

A scary idea about market timing

Bull vs. Bear Technology Adoption Cycles
● Innovation in bull markets favors
established, rather than new, tech
trends
● If the crypto market sentiment
changes today, CeFi might be the
greatest beneficiary
● The systemic changes in the DeFi
space need to happen ahead of the
next bull cycle

Summary
● DeFi is incredibly well positioned to take advantage of the current dislocation in the
crypto space
● The opportunities are many but the execution far from trivial
● Credit, capital efficiency, risk management and TradFi bridges are, arguably, the biggest
areas of opportunities in DeFi
● The innovation cycle must happen before the next bull cycle

Thank You!
Jesus Rodriguez
jr@intotheblock.io
medium.com/@jrodthoughts
intotheblock.com

DeFi Opportunities and Challenges in the Current Crypto Market

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