The product lifecycle inevitably requires design decisions that should not be made in isolation from the intended use case and users of the product. Therefore, developers must identify a user and a use case before embarking on the product development journey.
DeFi (decentralized finance) developers must ultimately decide whether their technology will be used to make existing economies more efficient or whether it will form the basis for new economies.
Kia Mosayeri is the product manager at Balancer Labs.
What is DeFi's use case?
When thinking about the "real-world use case" of DeFi, the idea is often expressed that DeFi's efficiency could be a replacement for the back-end systems of both fintechs and traditional finance (TradFi). This is the DeFi mullet thesis.
DeFi is indeed well positioned to be used by Fintechs and TradFi, but it is short-sighted to think that this will be the only use case. It is often the case that novel technologies are first deployed to make existing economies more efficient, but then spur new economies that were not previously possible.
DeFi will not only be used as a backend for TradFi, but will also spawn "net-new", web-3 native economies that would not have been conceivable in a pre-cryptocurrency world. I believe that developers will have to consciously choose between these two options, as they will have to make design decisions during the product lifecycle that mean different trade-offs for each of these use cases.
Old economy with new technology vs. new economy on new technology.
When the steam engine was invented, it was used to power ships that had previously been powered by wind. This was a massive improvement to an existing construct - maritime transport. The steam engine was also used as the basis for the invention of the railroad - a completely new design. Large-scale maritime transport was already possible with wind-powered ships and received a huge boost in efficiency from the steam engine. Land transportation on the scale made possible by the railroad was not possible until the railroad paved the way for new industries in landlocked areas.
In the pre-Internet era, if you wanted to book flights and hotels, you had to go to a travel agency, where an employee would book your trip by phone and fax. With the advent of the Internet, travel agents replaced their fax machines and phones with e-mail. Eventually, travel websites like Expedia automated the travel agency, keeping the same workflow and supply and demand - this was an old economy with new technology. Airbnb came later, expanding the supply side to include homeowners, while expanding the demand side by enabling new types of travel. Airbnb was a web-based construct and a net-based new economy.
The Internet has made media such as newspapers, television, and radio more accessible by leapfrogging previously required infrastructure. The Internet has also spawned new media such as blogs, podcasts, and community-created video content (e.g., YouTube). Radio and television over the Internet are old industries using new technologies, while blogs, podcasts, and YouTube are new industries.
The Internet made brick-and-mortar retail more efficient at ordering, forecasting, and managing inventory. The advent of e-commerce then expanded supply and demand in the marketplace.
The most important trend I point out is the following:
The manufacturers that built products to make old economies and constructions more efficient are not the same ones that created new constructions and economies.
Airbnb was not built by Expedia. Digital newspaper publishers didn't invent blogging around the year 2000. DeFi-mullet-fintech will not lead to net-new Web 3-native economies.
Builders will eventually be faced with design decisions that are not suitable for multiple use cases and users - builders will have to decide whether their technology is aimed at making existing economies efficient or creating the infrastructure for new economies. To create new designs, manufacturers will need to consider entirely new users and use cases in their product development cycle.
Design decisions for a net-new, Web 3 native economy.
Building a net-new, Web 3-native economy will be like building a permissionless DeFi infrastructure stack. The permissionless aspect of this stack is not only specific to the users interacting with the protocols, but more importantly to the creators.
This infrastructure layer should be both horizontally permission-free for other DeFi builders creating adjacent protocols, and vertically permission-free for users building economic layers on top of this stack.
This trend is already evident with DeFi developers optimized to be an infrastructure layer for new constructs, as opposed to developers optimized to enable TradFi and Fintechs to leverage the efficiencies offered by their protocols.
The first wave of money market protocols was focused on creating unbroken credit markets for trusted and liquid assets and focused on single market risk management.
The second wave of money market protocols, such as Fuse, focus on being a layer of infrastructure that allows anyone to create isolated markets without permission. They separate risk management on these platforms from the infrastructure itself, where market makers are responsible for adding collateral and setting credit parameters. This makes Fuse a platform with a variety of money markets, each with unique assets and parameters.
The first wave of automated market makers optimized efficiency for conventional assets by creating efficient pool types for those assets. The second wave of AMMs, such as Balancer v2's Vault, allows anyone to create an AMM with their own unique invariant on Balancer without permission. This makes Balancer a platform with a variety of AMMs, each with its own math optimized for different asset types.
The first wave of fixed-income protocols focused on specific assets. The second wave of fixed-income protocols, such as Sense, focuses on creating an infrastructure that allows anyone to create fixed-income securities from any yielding asset without permission.
What are net-new, Web 3-native economies?
The short answer is: we don't know yet. In retrospect, things like podcasts and Airbnb that didn't make much sense at the time of their introduction now seem inevitable. Today, these Web 3 network-based new economies may not yet be as vivid to most of us.
Some trends in the zeitgeist that suggest what these new economies might look like are Cloud Cities, the Metaverse, and GameFi.
The metaverse is not a new term or idea. The term dates back to Neal Stephenson's novel Snow Crash, published in 1992, and the idea is much older than that. In light of social media, massively multiplayer online (MMO) games, virtual reality/augmented reality, this concept has been on the rise for some time, but the use of the term itself has recently taken on new meaning as the economic implications of this concept became more vivid in the zeitgeist following the emergence of NFTs (Non-Fungible Tokens) and DeFi.
GameFi is perhaps a more concrete example. In the past, games attracted players through story/narrative, game mechanics, and visuals/graphics. Games like Axie Infinity introduced a fourth dimension: in-game economics. Game developers use templates, modifiable frameworks, and reusable infrastructure wherever possible to create the first three dimensions. If game developers want to add economics to their games, it is likely that they will succeed if they have access to an actionable DeFi infrastructure. Cloud Cities and GameFi make it clear that monolithic DeFi markets, where control of the markets is tied to the same apparatus that controls the protocol, are not feasible.
The old way is to engage in lobbying for governance or to reinvent the wheel by devoting developer resources to DeFi integrations - this will not go beyond the financial foundation of new economies. The new way is to do a single integration into the DeFi stack that allows projects to focus on their own core competencies and develop the product/service that people want.
DeFi developers have to decide whether they want to create the layer that creates these new economies or build technology that serves the efficiency problems of the old economies.