Fintech, DeFi and Faith
My personal journey through the wonderful, crazy and complex world of finance
A few months ago I started to panic. Not due to anything in my personal life, but rather due to a professional-existential dilemma. You see, as an investor, it’s imperative that I spend time focusing on and working with companies that have a real chance to drive outsized returns.
Of course, there is no silver bullet and no one is a prophet. So investing always requires a leap of faith - conviction that the areas you choose to spend your time on, are indeed areas worth spending time on.
Fintech
On the heels of this understanding, a few years ago I decided to spend the majority of my time on fintech. Not because I had any particular connection to financial services, but rather because fintech companies seemed to me to be most intriguing.
Fintech encompasses quite a few subcategories (that are all massive markets in their own right) which enables someone with a specialization in fintech to retain quite a broad mandate in terms of scope. I am far from the first person to develop a passion for fintech, and as you can see in the image below, fintech is undoubtedly one of the “hottest” sectors in tech.
It’s beyond the scope of this post to give a thorough description/analysis of the fintech market, but I’m more than happy to provide you all with a gross oversimplification that I believe defines the goal of fintech.
Fintechs provide both consumers and enterprises with better access to, and a better experience with, traditional financial services.
Though that sentence might be a simplification, it does a good job of describing the fintech darlings of the world like: Stripe, Robinhood, Square, Chime, etc…
Fast forward to a few months ago and I’m living the life. A new fintech company is going public every day, massive financing rounds are taking place in the private markets, and virtually every company is becoming a fintech company.
It was clear to me that I had made a prescient career choice by deciding to focus on fintech.
But then I started to learn about DeFi.
DeFi
The term, decentralized finance (DeFi) - refers to an alternative financial infrastructure built on top of blockchains, typically the Ethereum blockchain. DeFi uses smart contracts to create protocols that replicate existing financial services in a more open, interoperable, and transparent way.
Essentially DeFi refers to financial applications that run on an open, programmable blockchain for activities like saving, lending, sending money, trading, investing, and more.
And this is potentially groundbreaking, because for the first time ever, we, the global citizens of the world, have an alternative to our traditional financial systems.
If you want to take out a loan, for example, with DeFi you don’t need to convince a banker that you are credit worthy, you simply need to meet the requirements defined by the smart contract.
DeFi promises to bring an end to unnecessary amounts of paperwork and personal information in order to move money or interact with money. Anyone can gain access, provided they have the necessary resources to send transactions on the network.
And oh boy is DeFi having a moment. According to tracking service DeFi Pulse, the value of digital assets locked into DeFi services grew from less than $1 billion in 2019 to over $15 billion at the end of 2020, and over $80 billion in May 2021.
This is what true democratization looks like. What true innovation looks like. Rethinking the financial system from the ground up. It’s what fintech has always claimed to be, but has never really been.
Well….damn.
Dilemma
I had spent the past few years of my professional career developing a passionate conviction that fintechs would be the most impactful companies in the world. That modernizing financial services was one of the most exciting missions to have as a company.
I’d spent time cultivating relationships, developing networks around the world and investing in early stage fintech founders. But maybe it was all for naught. Maybe DeFi, which aims to completely rethink financial services from the ground up, would end up rendering fintech irrelevant.
And so like anyone in crisis, I turned to Twitter.
I hoped that one of my favorite writers, Packy McCormick, could help guide me, or at least assuage my concerns. Alas, disappointment struck when he never responded (no worries Packy, I still love you).
Faith
I was at a crossroads. And sometimes when I get to a crossroads, I find comfort in something that’s been with me since as long as I can remember: my faith.
Please don’t misunderstand me. I’m not that righteous of a person. I didn’t seek out a Rabbi or pour over religious texts in order to reconcile my newfound dilemma regarding the future of finance.
But luckily, my memory took over and reminded me of an idea from Rabbi Joseph Soloveitchik.
**(For those that aren’t familiar, Rabbi Soloveitchik is widely considered to be the father of modern-orthodox Judaism. He was world renowned for his Talmudic brilliance, his philosophical mastery and his innovative approach to marrying tradition with modern society.)**
In an essay titled “Confrontation”1, Rav Soloveitchik writes the following:
“It is paradoxical yet nonetheless true that each human being lives both in an existential community, surrounded by friends, and in a state of existential loneliness and tension, confronted by strangers. In each to whom I relate as a human being, I find a friend, for we have many things in common, as well as a stranger, for each of us is unique and wholly other.”
Rav Kook aka - “HaRav” Rav Soloveitchik, aka - “The Rav”
In other words, contradiction is part and parcel with the human experience. And indeed if I look at my own life, it is full of seeming contradictions.
I’m Israeli, but I’m also American
I live near Jerusalem, but spend most of my time in Tel Aviv
I have terrible style, but am a self proclaimed sneakerhead
I evaluate technology for a living, but have no background in technology
I’m a modern-orthodox Jew, the name of which is oxymoronic in and of itself
But when taking time to think more deeply about these apparent paradoxes in my life, I realize that the contradictions themselves are what makes me, me. Indeed, most things in life aren’t black and white, binary or mutually exclusive.
And in fact, another paragon of the modern orthodox movement, Rabbi Avraham Isaac Hacohen Kook , summarizes2 this exact point better than I ever could.
“Whoever said I have a torn soul, was indeed correct. Of course it’s torn. It’s impossible to describe a man who doesn’t have a torn soul….Man’s purpose is to unite the inner conflicts of one’s soul…for through greatness and majesty everything comes together in harmony.”3 (translation is my own)
Going Down the Rabbit Hole
With the inspiration above in tow, I continued to learn more about DeFi in order to find harmony between DeFi and fintech. What follows is my firsthand experience of the DeFi ecosystem.
Step 1: I created a Metamask account. While I already held some crypto assets in a more traditional exchange (Binance), Metamask serves as a sort of access key to the multitude of dApps (decentralized apps) out there.
Step 2: After securing my secret phrase, I transferred a small amount ETH from my Binance wallet to my Metamask wallet.
Step 3: I ventured out to Uniswap in order to exchange my ETH for some USDC, which is essentially the crypto native version of the dollar4. (Why did I do this you might ask? Well, to be honest, I had no idea at the time. But my good friend Max said that I can earn more interest by depositing USDC. ¯\_(ツ)_/¯ ).
Image: Uniswap’s interface. No instructions, not much of anything honestly. I was lost
Step 4: After indeed acquiring some USDC, I made my way onto Aave, to try and earn some good old fashioned interest.
Image: Aave’s interface. Not exactly intuitive
The Fintechization of DeFi
I have to admit, after I figured it out, my DeFi experience was eye opening. I was able to transfer money between accounts, exchange one currency for another and deposit that currency into an interest yielding account, all in the matter of a few hours without leaving my chrome browser. And that is just the tip of the iceberg.
Pictured above: my newfound respect for DeFi
But the overwhelming sentiment that I had after going through the above steps was: “well that wasn’t easy at all.”
Honestly, it felt the way the people describe interacting with traditional financial services about 10 years ago. No one liked/likes going to their bank. No one really understood the mechanics of their insurance plan, mortgage rates or how international money transfers work.
But fintech has changed all of that. It took out the complexities of interacting with financial services so that the masses could truly benefit from them.
And that’s exactly what’s missing from DeFi. Fintech.
DeFi needs to undergo a fintech revolution, similar to the revolution that traditional finance has been undergoing for the past decade+.
Let’s go back to the oversimplified definition I provided for fintech earlier: Fintechs provide both consumers and enterprises with better access to, and a better experience with, traditional financial services.
Fintech ≠ Traditional Finance. Rather, fintech enhanced traditional financial services because those were the only financial services available. Fintech didn’t reinvent payment rails or underlying banking infrastructure5, but it improved the collective experience of interacting with them.
Have a Little Faith
As I mentioned above, I’m no prophet. I’m still learning about DeFi and I’m sure I got many things wrong in this post.
But the bottom line, is that I’m long fintech and long DeFi. One of my core beliefs is that the vast majority of the world’s population couldn’t care less whether or not the service they use is centralized or decentralized - as long as the service works well and is pleasurable to use.
In fact, companies such as Coinbase, Blockfi, Paxos and Fireblocks are all great examples of companies that are bringing DeFi concepts to the masses…..but still in a centralized way (also referred to as CeFi).
There are also already some great examples of use cases in which fintech and DeFi have come together. See the below tweet as an example, as well as this and this.
So my excitement for fintech still remains. In fact, it’s been strengthened. The opportunity to continue to innovate on top of traditional financial services as well as to innovate on top of DeFi is massive.
There’s no doubt, that whether my observations have been right or wrong, the future of finance is going to be exciting. Beyond that, sometimes all you need is a little faith.6
https://traditiononline.org/confrontation/
Rav Kook, Hamachshava Hayisraelit, page 13
In yet another example of an apparent contraction, Rav Kook and Rav Soloveitchik are sometimes thought of as representatives of contradictory societies. Rav Kook is considered to be the most influential leader for Israel’s Dati Leumi (national-religious) community, whereas Rav Soloveitchik is considered to the most influential leader for America’s modern orthodox community. While to outsiders, these two communities may seem identical, there are in fact several acute differences. The potential conflict between the two Rabbis is demonstrated ironically in the way they are referred to by present day Jews: Rav Kook is simply referred to as: HaRav (Hebrew for, The Rabbi), and Rav Soloveitchik is referred to as: The Rav). Surely, there can only be one: “the”. Of course, while the two didn’t agree on everything, anyone who has spent time studying their works can see a plethora of similarities within their teachings.
For a much better explanation of this, click here
Again, a bit of an oversimplification and there’s much more nuance to this.
For further reading and much better explanations of DeFi, see the following links: https://wifpr.wharton.upenn.edu/wp-content/uploads/2021/05/DeFi-Beyond-the-Hype.pdf https://newsletter.banklesshq.com/p/defi-is-eating-finance. https://www.notboring.co/p/is-blockfi-the-future-of-finance https://www.cryptechie.com/p/defi https://medium.com/racecapital/defi-infrastructure-101-overview-market-landscape-78e096a85834 https://fintechruminations.substack.com/p/defi-lending-20-reputation-and-real