The case for institutional-grade tools for DeFi The case for institutional-grade tools for DeFi
Institutional-grade tooling is needed to make sense of the rapidly evolving landscape in cryptocurrency and decentralized finance, but these tools are often out of reach for retail investors.
4 min read
Updated: Dec. 13, 2022 at 4:17 pm UTC
Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.
The past decade has seen a dramatic increase in the accessibility of financial services. From online banking to mobile investing apps, more people than ever before have been able to join in. However, we are still far from making it an even playing field, with large institutions such as hedge funds dominating the game to the detriment of the ‘little guy.’
The data bears this out. In the US, for example, the top 10% own 84% of all stocks. Moreover, retail traders consistently lose money to professionals, as evidenced by the fact that less than 1% of the day trading population predictably earns any profit.
Even barring day trading, the average retail investor underperforms the market by about 1.5% per year. One of the critical reasons for this is that large institutions have always had an edge in access to information and technology. As a result, they can afford to pay for expensive data feeds and trade execution tools, as well as the salaries of highly skilled traders and analysts.
These same dynamics play out in cryptocurrency and decentralized finance (DeFi). Institutional-grade tooling is needed to make sense of the rapidly evolving landscape, but these tools are often out of reach for retail investors.
The recent collapse of FTX, which left over a million retail investors out of pocket, is just the latest example of how the system isn’t built for the small investor. While the platform claimed to be transparent, it turns out that it was using its own token, FTX, as collateral and couldn’t meet the demands of its users when the details became public.
The need for institutional-grade tooling
Institutional-grade tooling in TradFi and in DeFi are very different. In the world of traditional finance, institutional investors have always had an advantage when it comes to data and execution; they can pay for expensive Bloomberg terminals and trade on private exchanges with lower fees.
In DeFi, however, the playing field is much more level. Public blockchains offer a public record of all transactions that anyone can access and analyze. Moreover, decentralized exchanges (DEXs) such as Uniswap provide low-cost trading for all.
That said, retail and institutional investors still need tools to make sense of the data. The DeFi space is incredibly complex, with a large number of protocols and products all vying for attention. As a result, it can be challenging to keep track of one’s positions, let alone analyze historical performance.
Even large institutions commonly use tools like Excel or alternatives such as Zapper and Debank, which only report on an investor’s static positions rather than historical performance. Unfortunately, these tools simply aren’t adequate for the task at hand.
This is where institutional-grade tooling comes in. These kinds of tools provide visibility into an investor’s portfolio, including detailed performance reports and analytics. This data type is essential for understanding how one’s positions perform and making informed decisions about where to deploy capital.
That said, DeFi tooling needs a lot of work to be on par with TradFi. Chiefly, user-friendliness is a significant issue. The current crop of tools is often complex and confusing, which makes it difficult for retail investors to get started. In addition, many available tools are aimed at developers rather than traders and investors. This is a significant problem because it means that the average person is effectively locked out of the space.
How tooling can boost inclusion
When the topic of financial inclusion comes up, the focus is often on products and services such as credit and banking. However, access to information and technology is just as important. This is where institutional-grade tooling can make a real difference.
By making data more accessible and easy to understand, tooling can level the playing field for retail investors. With better data, retail investors can make informed decisions about where to allocate their capital. This, in turn, will lead to better outcomes for them.
Inclusion goes beyond just increasing access to products and services; it’s also about empowering people with the knowledge and tools they need to be successful. Institutional-grade DeFi tools are a crucial step in this direction.
True financial inclusion in DeFi requires more than just making platforms available to everyone with an Internet connection. It necessitates rethinking how those platforms are designed and governed so that they can serve the needs of the broadest range of users, not just a privileged few.
Inclusive design is good for business. A study by McKinsey found that $12 trillion, or 11% of global GDP, could be added to global GDP by 2025 by advancing women’s equality.
The same principle holds true for DeFi. By making our platforms accessible and easy to use for everyone, we can create a level playing field where the best ideas win rather than the projects with the most well-connected insiders. This increased competition has already led to lower fees and better terms for users across the board. And as DeFi matures, we can expect even more innovation and improvements in the available products and services.
There’s still a long way to go before we achieve true financial inclusion in DeFi, but the benefits of doing so are clear. By working to make our platforms accessible to all, we can create a more robust, more vibrant ecosystem that delivers value for everyone.
The state of DeFi tooling
Today, there are only around 4.8 million DeFi wallets, representing a small fraction of the potential market for DeFi, and an even more minuscule portion of the traditional banking population.
Not only are there relatively few people using DeFi applications, but the amount of capital locked in DeFi protocols is also still relatively small. For example, the total value locked (TVL) in DeFi is currently around $53 billion, representing just 7% of the overall cryptocurrency market capitalization of $800 billion.
With such a small base of users and capital, it’s no surprise that the current state of DeFi tooling is lacking. They’re also commonly jargon-heavy and challenging to use, reducing accessibility.
For DeFi to reach its full potential, the community must unite to improve education and make tooling more accessible. This is the only way to ensure everyone has a fair chance to participate in the space. We can create a brighter future for all with better tools and increased inclusion.
About the author: Elie Azzi is the co-founder and CPO of VALK, building an ecosystem of powerful decentralized tools for smart trading and investing in DeFi for retail and professional users. Elie was previously an entrepreneur in residence at R3 and a blockchain architect at BNP Paribas.
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FTX
FTX is a defunct cryptocurrency exchange, currently in bankruptcy proceedings, that was founded by Sam Bankman-Fried and Zixiao “Gary” Wang in May 2019.