Our Long-Term Thesis for DeFi

Why DeFi seems inevitable

September 12, 2022Michael Nadeau
Our Long-Term Thesis for DeFi

Hello readers,

DeFi projects currently represent about 1.5% of the total crypto market cap. Meanwhile, DeFi has arguably the most clear and established product-market fit (i.e. revenues) of any crypto sector. We believe DeFi should be 10% of the crypto market cap at minimum, and could ultimately be much higher. As we started analyzing this, it came to our attention that we have yet to lay out our long-term thesis for DeFi. That’s precisely what we’re going to do over the coming weeks and months. This is a big topic. To see the potential future of DeFi, we need to pull on several strings.

Therefore, we’ll break this into a few different components. To start, we are focusing on the high-level trends and signals that broadly point to DeFi adoption in the coming years. In future reports, we will hone in on specific niches within the sector: lend/borrow, exchange/AMMs, insurance, derivatives/options, payments/stablecoins, etc. This is where we’ll get into specifics and share our predictions for each sector.

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Let’s go.

The Power of Open-Source Technology

As we’ve noted in the past, public blockchains are just the latest representation of open-source tech. Historically, open-source creates a new wave of innovation due to the lack of barriers to entry for entrepreneurs. This creates intense competition, reduces costs, and adds new functionality and efficiencies to various industries. The ultimate output is that we get new and improved products/services and reduced costs that disrupt the status quo incumbents.

We are witnessing this today with DeFi and web3 more broadly. So, please don’t let the New York Times, Wall Street Journal, or your grumpy uncle distract you from the first principles of what is playing out. Looking back at the history of open source through projects like Linux is instructive. Linux is an open-source operating system that started as a fringe movement in the 90s. Here’s what Microsoft said about Linux on June 1st, 2001:

“Linux is a cancer that attaches itself in an intellectual property sense to everything it touches.”

-Steve Balmer, former CEO of Microsoft

This sounds strikingly similar to how Warren Buffet and Charlie Munger talk about crypto today. How much Bank of America stock do those guys own again?

Fast forward to 2022, and Microsoft is one of the largest contributors in the world to Linux. 3 billion Android phones run on Linux today. Most of Apple’s software runs on open source, as does almost all of Amazon’s cloud data centers.

“Composability is to software as compounding interest is to finance.”

- Chris Dixon, a16z

Key Takeaway: Open Source Tech *always* creates a new wave of innovation. Public blockchains are simply the latest expression of this. The critical difference between public blockchains and past open source technologies such as Linux is that public blockchains are *monetizable* via tokens — something that was not possible with Linux.

How much do you think Linux would be worth had it been monetizable - knowing that Microsoft, Google, and Amazon are leveraging it for their business models? How about base layer open source internet protocols such as TCP/IP, SMTP, or HTTP?

This is what Ethereum and other Layer 1 public blockchains represent — base layer open-source technology protocols upon which developers and entrepreneurs are building the next iteration of *open internet* products and services. We get to own these open-source technologies this time.

DeFi is largely built on Ethereum today. DeFi protocols themselves are also open-source. This means anyone can “plug into” any DeFi protocols and create a unique user interface or some other complementary service using the base protocol functionality. For example, Robinhood could tap into a DeFi protocol such as Uniswap and offer new services to millions of customers, all without asking for permission or building their own Automated Market Maker/liquidity engine. For this reason, DeFi is extremely scalable. 

Source: Arkk Investment Management


The fact that DeFi is natively open source means it is a fully transparent system. One of the open-ended questions today when it comes to DeFi is whether it will ultimately end up on the right side of regulatory history. This really shouldn’t even be a serious question. Why? If you’re a regulator, your job is to protect consumers from opaque financial institutions. Full stop.

Therefore, if you were to rebuild the financial system, what is the first thing you would want to implement? What is the essential base layer?

You would probably want that system to be built on open-source technology where the code and rules are fully transparent to all participants. You might even want that system to rely on a public ledger and settlement network where every transaction recorded is immutable and open for anyone to observe. You might want that system to be so transparent that you can see the collateral positions of all markets, allowing you to assess the build-up of systemic risk. You might want the system to execute autonomously and without bias. And you would probably want that system to be accessible by anyone.

This is the underlying truth of DeFi. No, it’s not perfect. Yet.

That said…

DeFi is a Better Product

Every powerful new technology has a few common traits that help to move the world forward:

  • Create new efficiencies

  • Create new functionality, new business models, or complement an existing product/service

  • Reduce costs

DeFi does these things in spades. Below we can get a quick view of the efficiency of DeFi AMMs and the ability to strip out unneeded intermediaries.

Digital artwork by Laerta Premto

But DeFi (and web3 more broadly) does so much more than reduce costs and create efficiencies. It allows for the monetization of *open internet services* (such as decentralized liquidity providers) and entirely new business models. We covered this in our Tokenomics 101 report a few weeks back.

The composability of the underlying open-source tech that DeFi is built upon creates an entirely new user experience based on data portability, which favors the consumer. This is rooted in user control of data. In DeFi and web3, you control your data, which sits on the blockchain, and you access it with your private key through a wallet. This allows you to easily leverage your assets across a number of applications with the ease of clicking a mouse. Want to provide liquidity on Uniswap? Just connect your wallet. Want to get a flash loan on Aave? Just connect your wallet. Want to stake some assets on Lido? Just connect your wallet. You get the point.

Global Distribution of Wallets

As DeFi products improve, their scalability will become correlated with the rise of cell phones and internet coverage globally. All you need is an internet connection and a wallet to access DeFi. According to Statista, 83% of the global population uses a smartphone today. This is up from just 49% in 2016. 

Source: Statista

This means that folks in emerging markets all over the world will have access to DeFi services, and the ability to transact money instantly — transforming commercial and financial experiences. These consumers will hold the power of a bank branch in their pockets and demand wholesale pricing for many financial transactions, changing their relationships with financial service providers as well as expanding markets to those previously unbanked (estimated 1.7 billion globally).

Tokens and Incentive Models

We’ve written extensively about tokens and how they are used to bootstrap the formation of multi-sided markets and open internet services. This enables entirely new business models where the early users get to own a part of the network. Using tokens to incentivize users with buy-in and loyalty is simply a better model than using VC $ to bootstrap. Here are a few of the benefits:

  • Early users get ownership. This locks in loyalty.

  • Since your early users are owners, they become free, organic marketing.

  • Owners are more incentivized to look out for the long-term viability of the network. Therefore, they vote on governance and propose creative solutions to difficult problems.

  • Tokens remove friction and allow retail investors to access early-stage venture investments for the first time.

Moving on…

Internet Culture, Shifting Demographics, Macroeconomics

Internet Culture

Bitcoin does not have a CEO. It doesn’t have a marketing department. It doesn’t have a sales team. It doesn’t have a “road map” or quarterly earnings calls.

Yet Bitcoin, which started as a fringe movement among libertarians in a small internet group chat has grown to be a $1.2 trillion dollar asset (at cycle peak) via a decentralized cohort of evangelists and believers. Bitcoin is the fastest network or company ever to achieve a $1 trillion market cap. It is currently being integrated into financial systems worldwide. Nation States have adopted it as legal currency. Fortune 500 companies hold it on their balance sheets. Blackrock is currently integrating it with client systems holding 22 trillion worth of capital.

It’s important to understand exactly how and why something like this has transpired. The internet is fundamentally allowing global, decentralized groups of people to organize. It happens on Twitter. It happens in Discord servers. It happens on Telegram. It’s happening.

The internet has scale and distribution that we still struggle to fully grasp.


Meanwhile, America and countries around the globe are going through a structural shift in demographics. In the US, the last of the baby boomers are set to retire in 2030. Younger generations have distinctly different ideas about what the future should look like. And they are increasingly getting a seat at the table. The recent lobbying clout that millennial crypto founders have shown in Congress should not be glossed over. Furthermore, we continually see more and more crypto supporters amongst elected officials.

The Internet is Evolving

Balaji Srinivasan recently released his new book, The Network State. It is a fascinating take on how technology has progressed from allowing us to start new companies, to new communities, and now to new currencies. The book proposes that the next chapter of technological progress could be the idea of a “network state.” While this may seem far-fetched, the foundation of the idea is rooted in the first principles of what the internet is enabling in terms of decentralized community building.

History tells us that access to information via the printing press ultimately led to the separation of church and state.

We should be clear-eyed about what the internet is enabling in terms of access to and distribution of information. With this context, it is reasonable that we could see the separation of money and state in the coming decade (s). If this is the case, who is to say that a “network state” and the formation of new countries birthed via the internet is not possible?

After all, we just witnessed Donald Trump rise to world power via a Twitter account.

Which highlights…

Lack of Trust in Institutions

Trust in institutions, governments, and mainstream media continues to degrade. Per the linked Gallop Polling numbers, we are currently at all-time lows across categories such as Organized Religion, the Supreme Court, Public Schools, Newspapers, Congress, Television News, the Presidency, the Police, Big Business, etc.

Global institutions such as the World Bank, the IMF, NATO, the EU, and the World Trade Organization were all established after WWII. We also got a new monetary system via the Bretton Woods agreement in 1944.

History tells us that we can go through decades with seemingly little change. And then everything can change in a decade. It feels like we are in one of those decades where everything could change. Or is it just me?


If you’re reading this, you are probably aware of the broad macroeconomic picture around the world today considering historically high global debts while inflation hits 40+ year highs.

History is clear that long-term debt cycles are real. We are currently at the end of the latest unsustainable debt supercycle — which Covid poured gasoline on. History tells us that these periods typically lead to geopolitical turmoil — which can lead to revolutions, wars, and eventually a restructuring of society and global institutions — similar to what we saw heading into and post WWII. We don’t go back to the “old way” when all is said and done. While nobody can predict the future, those that are paying attention can probably see that we should expect some larger-than-normal changes in the coming years and decades.

One of these changes is that public blockchains and DeFi protocols could become the foundation for a new global financial system.


There isn’t just one factor that points to DeFi. It’s ultimately a combination of a number of things. This is what makes it difficult for the average Joe or Jane to grasp what they are looking at with a cursory glance at DeFi or web3 broadly. You need to zoom out. Look at things from first principles. Look at history. Look at trends in society. Look at the data.

If there is any doubt, just look at where VCs are deploying capital. And what the brightest people in the world are working on over the weekend.


Thanks for reading and for your continued support. As I mentioned, we’ll get into a more focused thesis for each sector in the coming weeks and months. If you got some value from this week’s report, please like this post, and share it with your friends, family, and social networks so that more people can learn about DeFi and web3.


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Individuals have unique circumstances, goals, and risk tolerances, so you should consult a certified investment professional and/or do your own diligence before making investment decisions. The author is not an investment professional and may hold positions in the assets covered. Certified professionals can provide individualized investment advice tailored to your unique situation. This research report is for general educational purposes only, is not individualized, and as such does not constitute investment advice.

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