Floundering amidst narrative destruction: inefficiency is the enemy

There is a role for decentralised finance in traditional financial services; look for the inefficiencies and robustly solve for them.

---

Welcome to another edition of the DeFi Mullet newsletter! In this newsletter, I hope to cover the arguably boring world of the most anticipated collab of the decade: Fintech x DeFi (ft. policy, markets, tech, product, etc).

If you are one of the fine folks who get a thrill from these topics, press subscribe below!

---

Happy 2023

2022 was an interesting year with its fair share of ups and (many) downs. As the opportunity of crypto has gone icarus mode we are presented with a chance to reflect and really evaluate our understanding of what is actually in front of us. It is not too hard to find instances where proper due diligence, proper risk analysis, proper disclosures, and proper consumer protection were deeply lacking. Although we bid farewell to many folks who have dabbled in DeFi over the past two years, it is important for those that stick around to have theses and analyses driven by reality: a first-principles understanding rather than blindly assuming crypto/web3 is the solution for literally everything. It has been incredibly difficult to ascertain signal from noise over the past two years and a culture of outsourcing diligence or gulping down spoonfuls of confirmation bias has led to the capital of many, both consumers and professionals, being utterly incinerated.

We are in a period of narrative destruction and it is clear many are not equipped with the tools to cope. First, it must be said, recycling the narratives of the recent past is not a path to adding value; in fact, it is detrimental. Doubling down despite overwhelming evidence to the contrary is anathema to the “HODL 💎🙌” mindset that has been the degen obsession in DeFi → in normal life, we call this for what it is, gambling. For the folks that are sincerely passionate about the role continuous improvement in financial services can play in the lives of billions of people, do not give up. Although the continued quest for the killer use case may occupy the minds of the commentariat, boring old financial services remains an opportunity worth continued exploration.

This post will contextualise what continuous improvement in financial services means and the role decentralised finance can continue to play going forward. This is part rant and part love letter.

Is the financial services industry broken?

There can be a tendency to assume that traditional financial services are rotten to the core and thus must be overturned. It is my view that this is a reductive take that oversimplifies the complexity and importance financial services plays in our lives. Global financial markets are unfathomably large and the fact they continue to operate with most folks in the world not needing to know how is evidence as to how much of a miracle this is (this is the love letter I was talking about). If this is the case, why do so many of us claim global financial services is broken? Well, for one reason, we all have a financial interest to do so: good old fashion bag pumping. Consultants, fintechs, decentralised finance, regulators, venture investors, and legacy financial institutions all attract status, attention, relevance, and financial gain by making the claim that financial services is broken. Yes, in some instances, financial services offerings are in fact broken but in the majority of cases they are simply inefficient. It is making a dent in this inefficiency, given the technology available to us at the time, which is where both fintech and DeFi can continue to find realisable business opportunities. Remember, technological progress has (and will not) grind to a halt → therefore, perceived inefficiencies will always continue to exist.

This guy wrote a thing or two about innovation theory

What is value transmission?

Consider ourselves as the centre of our own universe. Everything we think, want, do, and need is a job-to-be-done in an incredibly nihilistic assessment of our time on this planet. We have direct actions that transmit value directly to us: we can think of direct actions as those things that we, as individuals, directly interface with → our Apple products, our bed, the food we eat, etc. We also have a massive amount of indirect value transmission: we can think of this as everything that occurs to facilitate something that is impacting us in the background → pension fund administration, government department for food and agriculture, B2B SaaS, manufacturing of bore pipes, etc.

Depending on your school of thought regarding the meaning of life, let's say that we, as individuals, exist to survive, prosper, enjoy ourselves, and reproduce. We have finite time on this planet and seek to optimise the value transmitted towards ourselves and the efficiency of that value transmission. An example I like to use is Facebook: the job-to-be-done was connecting with friends and family without needing to travel or schedule a call → this was a significant efficiency improvement and the fact that it could occur synchronously or asynchronously in a multi-player environment was a significant value improvement upon the status quo. Facebook improved the direct value we received and will continue to be adequately compensated for that until someone or something else replaces them.

We can think of the financial services industry as the infrastructure for the flow of capital (a form of value transmission), both direct and indirect. By addressing some of the stubbornly hard problems in financial services, DeFi x Fintech has an opportunity to improve how value is transmitted directly and indirectly to individuals. In order to ask the right questions, it is crucial to understand the structural role financial services play in the reality of our everyday lived experiences.

Inefficiencies in Financial Services

Now that we have a method (mapping value transmission) to find those pesky inefficiencies, we can use this to identify some core areas of opportunity. To assess how we will solve them, we need to utilise the technology of today in order to render the technology of yesterday obsolete.

If we were to rebuild modern financial services from first principles, would it look identical to our current financial services architecture? Honestly, probably not. There are a number of stubbornly hard problems in our financial services architecture that continue to permeate today. When analysing the problems below, keep in mind the following:

• What benefit is directly transmitted to the individual?

• What benefit is indirectly transmitted to the individual?

• What process or problem am I solving and/or realising enhanced efficiencies?

Stubbornly Hard Problems in Financial Services

1. Opacity

2. Regional interoperability

3. Time-to-money

4. Mitigating financial crime risk

5. Improving access to financial services

6. Improving access to credit

7. Identity management / KYC

Each one of these problems is a deep rabbit-hole with many different and often interrelated issues. In some instances, there may be things that are genuinely broken but in most instances it will be a culmination of several structural inefficiencies. DeFi, like fintech, is a technology in our toolbox that we can use when attempting to address these stubbornly hard problems.

Conclusion

DeFi has been primarily used as an avenue for speculation rather than as a technology solution that benefits the lives of actual people. The technology powering traditional financial services is boring to most consumers and, it stands to reason, the technology powering decentralised finance is most likely to be boring too. Boring often equates to stable, trustworthy, and most certainly not speculative.

For many of us that remain hopeful about the future of decentralised finance we must take a long-term horizon and accept that there will be numerous epochs addressing different problems of different severities at each distinct stage. The world is not perfect and financial services, when utilised by the right actors, can be a vector for significant financial empowerment. The purpose of this post is to provide a point of reference for articulating the legitimate real-world utility enabled by the technological advent of decentralised finance. It is my view that the most immediate use cases for DeFi are those that address the inefficiencies of the stubbornly hard problems in financial services.

---

If you are looking to build or are investing in what’s next, would love to chat - please reach out via DM on Twitter or reply via email 🙏