Seasoned entrepreneur and investor Steve Streit has been enthusiastic about the potential of decentralized finance (DeFi) for years. His firm, SWS, is a high-conviction investor in several protocols and companies in the space, and he’s pleased to see that the wider world of finance is increasingly bullish on it as well.
Streit and other crypto-industry backers know that the sector’s growth won’t happen on a smooth curve, and that future “crypto winters” will test the conviction of some in the space. However, he believes the long-term prospects are strong, and that DeFi and the blockchain technology it’s built on have the power to transform the value chain for the better.
Here’s what Streit and his peers see as the most important trends driving the next phase of DeFi’s evolution.
“TradFi” Is Getting “DeFi”-Curious
DeFi companies have a better sense of what traditional finance companies want from the blockchain these days, and they’re getting more sophisticated about the solutions they deploy to attract them.
For example, Solana recently debuted 13 new token extensions in an effort to draw more transitional finance institutions “onchain,” DLNews reports.
“A growing number of enterprises are interested in the benefits of blockchain, but want to ensure that they can adopt the technology in a responsible way that adheres to their internal compliance processes,” Amira Valliani, policy head at the Solana Foundation, explained.
Streit and his peers believe traditional finance companies may continue to become more comfortable with DeFi, adopting decentralized protocols (or developing their own) over time.
Retail Investors Are Less Skeptical of Crypto Today
The “TradFi” trend intersects with another important development that’s advancing the crypto, blockchain and broader DeFi industry: retail investor enthusiasm.
A certain retail subgroup has always been bullish on crypto, but until recently it was made up mainly of early adopters whose belief in DeFi was more philosophical in nature. The newer, larger group of interested retail investors believes in DeFi for even simpler reasons: namely, that it’s profitable.
The release of the first Bitcoin ETFs could be the start of a transformational wave of activity in mainstream markets. In the not-too-distant future, the lines between “crypto investing” and “equities investing” may be much blurrier.
Falling Interest Rates Could Bode Well for the Industry in the Coming Years
Although the correlation is not perfect, DeFi tends to benefit from low interest rates. This is not only due to the fact that DeFi startups have an easier time raising money when rates are low, but because low interest rates can spark inflation and raise concerns about the stability of government-led central banks (the bedrock of the “TradFi” system).
It’s possible, although not assured, that interest rates will fall in the next one to two years. Depending on the trajectory of inflation and overall economic performance in developed economies like the U.S. and Europe, they could remain low for even longer. This could prove to be a lasting tailwind for DeFi.
Regulation May Be a Good Thing in the Long Run
Much has been made of the apparent crackdown on risky, unregulated crypto activity. Truth be told, there’s less to this than meets the eye, as many of the highest-profile legal moves have been aimed at instances of outright fraud or theft.
In fact, many DeFi proponents believe that sensible government regulation is a good thing for the industry in the long term. A stable regulatory environment offers predictability for companies currently operating in the space and those planning to enter it. It may also give mainstream consumers the confidence needed to explore opportunities here.
AI and Crypto Are Complementary, Not Competitive
Until about two years ago, crypto was the darling of the tech industry. Today, that crown rests with AI.
Is that a bad thing for DeFi? Perhaps not. Many DeFi advocates believe that crypto and AI are complementary rather than competitive, and that AI can help unlock new uses for decentralized tokens and blockchain protocols. AI could also help solve the industry’s energy problem by making crypto mining operations more efficient.
What’s Next for DeFi?
Experienced investors like Steve Streit believe the decentralized finance industry may look very different in a few years than it does today.
They believe it will be bigger, more profitable, more impactful, and capable of solving a much wider range of problems.
Some might go so far as to say that they believe DeFi is the future of traditional finance.
Based on recent history, betting against this vision of a more democratic financial future seems risky. But only time will tell what’s next.
