> permissionless architecture, but a gated community
Web3 is a foundational level technology that is transforming society and economies. Significant innovation will be built on the Web3 stack. This innovation; and participation in its economic value creation will be via a token ecosystem, leading to a tokenized economy. Process orientation, philosophically, & also business model design-wise, the tokenized crypto ecosystem will be largely decentralised, and will evolve via a complex roadmap. Decentralised finance (DeFi) is the essential financial layer of web3, based on the tokenized crypto ecosystem (as opposed to traditional finance or TradFi which is based on fiat money.
DeFi has been born as an alternative acute inadequacies of TradFi, which is centralised (concentration & permissioned), inefficient (well, mostly), un-transparent, and its design choices foster exclusion across the financial spectrum — gravitating both access and returns only to the top 1%. However, despite its rising adoption and its inherent potential to disrupt TradFi, DeFi struggles to be open not only to new mainstream investors, but even for most crypto aware investors.
The complexity of DeFi is emerging from two current market realities:
1] asymmetric access to products and protocols, arising from a widely-fragmented infrastructure and niche use cases evolving from specialised DeFi applications, coupled with severely clunky UX — an interface that actually acts like a gatekeeper.
2] lack of organisation of crypto intelligence that prioritises prudent investment planning and simplicity; efficiently informed by human experience and blockchain analytics; on par with cutting-edge hybrid-AI wealth management solutions in TradFi.
The combination of these two complex realities squeezes the majority of investors out of DeFi. I call this The Crypto Squeeze. This compression is an unintended consequence of the complexity arising from building an internet-native distributed financial system, and its dizzying pace of innovation that a majority of ecosystem participants and investors are struggling to align with.
Understanding the interaction of different DeFi protocols is not easy. Complexity in the growing crypto product markets, managing multiple CEXs and DEXs (centralised and decentralised exchanges) accounts, managing investment transactions in numerous projects and protocols on multiple blockchains. That too after, only having a basic comprehension of products like liquidity pools, yield farming, staking, crypto lending, derivatives like perpetual — all this is extremely tedious, and even full-time commitment will not solve it comprehensively.
Even understanding the basic economic models of various tokens is complex. Tokenomics, token utility design and value flow to a project’s token is not just a proxy of conventional equity relationship to business performance or promise. On top, managing continuously rebalanced portfolios of token investments is complex in itself. Looking at blockchain analytics shows this aspect of the effects of asymmetric access clearly — the level of value concentration in crypto is very skewed. The squeeze is at work. An application layer which does all the heavy DeFi lifting will be an essential component to address the squeeze.
Investment decisions in the crypto space by listening to podcasts and participating in numerous discord groups is not a sustainable route, even if done full time. Yet, there is resident human experience and knowledge in the crypto ecosystem — people who have been in the web3 maze long, and have experienced its cycles, inter-relationships & correlations. And blockchain inherently is an open information system, where blockchain metadata is accessible and holds enriched transaction data. Organising this human experience & blockchain analytics into deep, yet easy insights and simplified products in the application layer will be another essential component.
We have a permissionless architecture, but a gated community in web3. The tokenized economy of web3 will need a radically different, yet simple paradigm of decentralised on-chain asset management. Managing and escaping the crypto squeeze needs systems thinking led protocol design to create a truly permissionless ecosystem open to everyone to participate & prosper in the financial future of web3.
