DeFi enters its second act

Controversial crypto mogul Justin Sun has traded his T-shirts and hoodies for sharp suits. By doing so, he hopes to show a more mature side to the blockchain industry, he told an audience at the Token2049 conference in Singapore last week.

Similarly, decentralized finance (DeFi) is also going through an “adulting” phase.

While DeFi began as a playground for gamblers and “degens” gunning for astronomical but risky returns, it’s moving to its second act: capital preservation, compliance, and institutional adoption, crypto investors and entrepreneurs tell Tech in Asia.

Image credit: Timmy Loen

The crypto winter may be a catalyst as it has curbed the appetites of risk-averse traders. But real demand for DeFi may be coming from traditional finance (TradFi).

More TradFi firms are forming entities to make direct investments in crypto, which inevitably means dealing in tokens, says Danny Chong, co-founder of DeFi protocol Tranchess.

He brings up the likes of Temasek-founded Superscrypt, an investment firm that has backed early-stage Web3 projects such as promising next-generation blockchain Aptos, as well as Japanese investment bank Nomura’s Laser Digital, which will, among other things, do secondary trading of tokens.

“You’ve never seen a bank that’s so forward looking in DeFi, but it’s something that’s happening,” adds Chong.

Show me the money

New and established DeFi players are eyeing this new crop of well-moneyed clientele.

ZkLend, a lending protocol launching next year and built on Layer 2 network StarkNet, will deploy Artemis, a product for retail investors, as well as Apollo, which will serve institutions. The project has raised US$5 million from investors.

While Artemis retains the free-for-all modus operandi of retail DeFi, Apollo will run a separate pool of capital for vetted corporate as well as high-net-worth lenders and borrowers, explains Brian Fu, a former investment banker and the Hong Kong-based co-founder of zkLend.

Another major difference is that loans on Artemis are over-collateralized – meaning borrowers pledge more capital than they’re taking out – given the risks of loaning to anyone and everyone. That is not the case with Apollo.

Serving large establishments makes business sense. “Retail capital for lending has saturated” in DeFi, Fu says.

Instead, zkLend aims to tap new sources of capital that will flow from institutional players.

Short-term compromises