Thread by @paddi_hansen

1/ 2021 was the first year of the @BanklessHQ DeFi mullet thesis playing out.

Fintech in the front, DeFi in the back.

A thread on the 5 most important CeDeFi projects in 2021 and what to expect for 2022 👇

newsletter.banklesshq.com/p/the-defi-mul… @RyanSAdams @TrustlessState

2/ The most spectacular event was the French banking giant @SocieteGenerale (6th biggest bank in Europe) submitting a public governance proposal on MakerDAO to have their new bond tokens approved as collateral for $20m in DAI.
coindesk.com/business/2021/…
@MakerDAO @RuneKek

3/ Having a multinational bank engaging on a DeFi governance forum with a DAO and a bunch of pseudonymous Maker contributors is mindblowing - and surely won’t pass unnoticed by other banks.

This is probably the largest banking DeFi adoption step to date.

4/ Another big CeDeFi action in 2021 relates to fintech companies using stablecoins & public blockchain rails for payments & settlement.

VISA settles through USDC with @cryptocom & builds a L2 payment network for stablecoin settlement.

decrypt.co/82233/visa-uni… @cuysheffield

5/ And @novi announced to start a payments pilot with USDP (on #Ethereum) instead of using their permissioned Libra blockchain.

DeFi payment rails with fintech frontends will explode in 2022.

techcrunch.com/2021/12/09/wha…
@davidmarcus @PaxosGlobal

6/ However, the most consequential CeDeFi projects in 2021 relate to lending & borrowing, the CeDeFi use case I expect to grow the fastest in 2022, even outpacing CeDeFi payments.

7/ First & foremost, @coinbase just launched a DeFi yield product for non US customers, depositing assets into @compoundfinance.

This step is huge and should alarm all banks around the world.

8/ Savings interest rates in banks are around zero or, in some place, even negative.

With average 2-6% stablecoin yields on Compound, more and more bank deposits will make their way into these kind of CeDeFi products.

@rleshner @brian_armstrong
bloomberg.com/news/articles/…. #DeFi

9/ Meanwhile, @AaveAave, the biggest DeFi lending/borrowing protocol in terms of TVL, has launched Aave Pro for institutional lending in cooperation with @FireblocksHQ (centrally responsible for KYC/AML/compliance).

finance.yahoo.com/news/aave-debu… @StaniKulechov @0xJim

10/ Shortly after, Switzerland’s @WeAreSEBA bank announced its intention to use Aave Pro and shared a governance post to get whitelisted.

Wouldn’t be surprised if we see hundreds of banks/ institutions connecting to Aave Pro or Compound Treasury in 2022.

theblockcrypto.com/linked/128281/…

11/ The 5 most important DeFi steps in 2021 at a glance

Societe General 🤝 MakerDAO
VISA 🤝 USDC
NOVI 🤝 USDP
Coinbase 🤝 Compound
Aave 🤝 Fireblocks

So what’s next in 2022?

12/ CeDeFi lending products will likely explode.

In times of inflation and zero interest rates, every bank & fund (sitting on billions of capital without with limited investment opportunities) around the world is eyeing the current CeDeFi developments very closely.

13/ For DeFi lending platforms, these potential liquidity & revenue sources are massive, and I expect most of the teams to continue to be willing to concede some degrees of decentralization in order to attract that.

14/ I also expect CeDeFi payment rails to further accelerate.

But due to the required network effects for those use cases to thrive, I expect these to scale more slowly at first, and to explode at a later stage at a certain tipping point of mass adoption.

15/ Due to regulatory/compliance questions & higher technical/operational risks & complexities, other CeDefi use cases like DEX trading, derivatives, insurance, prediction markets will probably need more time.

16/ Overall, I am bullish on the @BanklessHQ DeFi mullet thesis in 2022.

Long term, I agree with @twobitidiot that more & more DeFi TVL will institutional and also kyc’d or tied to some other form of identity or reputation, opening up further opportunities (credit scoring etc.)

17/ But I might be wrong and CeDeFi traction faces some potential risks and barriers for further adoption. Let me finish with a quick overview of those.

18/ Regulatory risk.

CeDeFi adoption will force regulators to scrutinze DeFi even more closely. There is a reason why Coinbase doesn't offer its Compound yield product in the US.

Regulators might step in even more aggressively in 2022.

techcrunch.com/2021/09/20/fol…

19/ Decentralization risk.

A key balance has to be found between institutional adoption and sufficient DeFi decentralization. Without decentralization, DeFi becomes a mockery.

20/ Governance risk.

With big institutions acquiring relevant stakes in DeFi projects and governance tokens, the risk of governance attacks becomes more pressing.

21/ Reputation/hack risk.

With total DeFi exploits and hacks of over $700m in 2021, there is always the risk of having large scale user funds stolen or hacked.

Should that occur to CeDeFi customers on Coinbase, I wouldn’t be surprised if they stopped the product entirely.

22/ Competition of Non Custodial wallets.

The fintech USP is the frontend, the intuitiveness and simplicity of the UX layer.

If wallets get good enough at that, a growing number of users might decide to go wallet in the front, DeFi in the back directly.

23/ That is our goal for the @UnstoppableDeFi wallet - to be launched soon. To be as smooth & accessible as mainstream fintech applications.

However, I rather expect CeDeFi and wallets to grow hand in hand in the foreseeable future.

/END