As Chief Operating Officer of the non-profit Wall Street Blockchain Alliance, I was interested in learning more about a new trend in the crypto space known as decentralized finance and how its creators and operators build robust communities of stakeholders. With hundreds of members spanning all aspects of financial services, decentralized finance, also known as DeFi, will have a significant impact on the work of our organization throughout 2019 and beyond.
While there is no uniform definition for DeFi, the term is commonly used to characterize traditional financial applications and services (payment rails, deposit accounts, lending products, wealth management) that are built on top of blockchain technology. DeFi offers a number of tantalizing use cases, such as allowing participants to instantly send money around the world 24/7/365 or earn interest on their crypto holdings, as its multiple participants seek to lay the foundation for a robust and diversified financial system based on blockchain technology.
At the same time, while blockchain technology and its attractive ideology can be a tremendous incentive for users who are dissatisfied with the current financial landscape, there is a chance that the very properties of decentralization that encourage users to go DeFi may actually limit the long-term potential of some of these platforms. Why is this so? Because by their very nature DeFi products can restrict touchpoints and interactions between customers and proprietors, potentially reducing brand loyalty and the ability to cross-sell.
To investigate this issue further, this week I spoke with two leaders in the blockchain space commonly associated with the DeFi movement, BlockFi CEO Zac Prince and MakerDAO Foundation President and COO Steven Becker. My overall impressions from these discussions are as follows:
- DeFi companies are acutely aware of how traditional banks and fintechs are trying to create loyal and engaged customer bases, and they are actively studying these models to determine how these strategies can be applied to their models
- The DeFi community is far from monolithic, so each company should be evaluated independently
- The future success of many products and services will depend on how much decentralization matters to the individual, especially if there is a perceived tradeoff between decentralization and customer value
- Purely decentralized organizations and products often do not evolve as fast or grow as fast as hybrid or centralized firms, but they also operate on a different time horizon
The FinTech Challenge
This is an important discussion to have today because crypto is actively competing against well-known startups, such as PayPal, Square, and SoFi (short for social finance), that offer easy to use products and have already amassed large customer bases. Furthermore, these firms are now even offering crypto-trading services. SoFi in particular deserves special attention within this discussion, because as its name suggests it has a strong focus on building brand loyalty and engagement with its customer base. According to a recent interview with Cheddar, SoFi CEO Anthony Noto highlighted that 2019 is focused on the social aspect of its membership offerings. According to Noto. “We provide our members more than these tangible financial products...We give them free career advice, free certified financial planning advice, member events, and we’ll continue to add to the more intangible elements of how to get your money right over the next year.”
The Blockchain Response - BlockFi
BlockFi’s goal is to utilize a variation SoFi’s playbook, which in the words of BlockFi’ CEO Zac Prince was “successful in implementing a strategy that is really geared around delivering as many valuable products as you can to your client base and then trying to create a really sticky relationship with them”. However, BlockFi is doing this with a set of products built on top of a blockchain-based technology stack.
This is a strategy that Mr. Prince is intimately aware of because he used to be a SoFi customer himself. In his discussion with me, he recounted a story in which when he first signed up for the service, the company sent him a small bottle of wine and some cheese that he shared with his wife. He remembered that it gave him a feeling that “this is a different kind of finance company” and that “I have a stronger positive sentiment to their brand than I’ve ever had to another finance company”.
In an effort to recreate these feelings toward BlockFi, the company is already actively engaging with its customers and broader community via mechanisms such as a drift chat on its website, as well as maintaining an active presence on social media (Telegram, Twitter, and Reddit). It also sends out quarterly customer surveys and hosts regular meetups for clients in large US cities. BlockFi does not focus too much today on cross-customer communications, but it is something that the company will consider in the future.
However, the most interesting part of the discussion with Mr. Prince was the fact that although BlockFi is often called a DeFi company, he does not consider to be one. When asked why, he noted that “We don’t think of ourselves as striving to, and certainly not at this stage doing anything in a decentralized construct. We think it is better to have a traditional corporate structure in terms of being able to raise money, in terms of aligning incentives, in terms of being able to hire people who know what they are doing.” He also noted that the centralized approach offers the ability to do things quickly such as iterate on new products, even in beta form, which can be difficult to do with a platform that completely runs on smart contracts and has little margin for error.
Further elaborating on his rationale behind this thinking, Mr. Prince was lukewarm on the idea that decentralization will be a major driver of customer acquisition in the long-term, saying “I don’t think that the majority of people, just if you take a random sampling of 100 people, care that much about decentralization…If we believe there is going to be another wave of adoption that occurs in the crypto sector, I think that the majority of those new entrants will likely be less concerned with or less focused on the decentralized component versus just the value proposition component.”
The Blockchain Response - MakerDAO
Compared to BlockFi, MakerDAO is often considered to be the epitome of the DeFi movement, and in his discussion with me, MakerDAO Foundation President and COO Steven Becker was confident that the decentralized nature of the platform will not only entice new users, but create a diverse, robust, sticky, and engaged community of stakeholders that will ensure its long-term success.
There were three major themes that arose from my discussion with Mr. Becker.
First, despite the slower nature of decentralized systems, they will engender robust and engaged customer bases because they are highly transparent about their risks and operations. He compared the setup of MakerDAO to fiat-backed stablecoins that may have grown more quickly but are opaque in the operations, making it difficult for customers to truly understand their operations.
Second, DeFi platforms have social benefits embedded within their DNA, making them more attractive in the long term to customers. Specifically, Mr. Becker noted that “There is a big difference between social finance and decentralized finance. In a nutshell, the social finance is trying to extract or trying to pull social impact, where I think decentralized finance is actually in a really awesome position to sort of push that impact.”
Third, when discussing community involvement Mr. Becker was unequivocal in his belief that stakeholder engagement (including holders of the MKR governance token, holders of Dai, market makers, and CDP creators) has been robust so far, but there is still a long way to go. He highlighted that right now these stakeholders are too concentrated around specific use cases. For instance, CDP users are often interested in borrowing Dai to make bigger bets in the crypto markets, and Dai holders often serve as liquidity providers.
Looking ahead, he wants “To have each set of those stakeholders be very well-diversified, and what I mean by that is in terms of their use in the system. The more diversified Dai holders are, that means we’ve got a diversified selection of use cases. The same with MKR token holders. The more diversified they are the more they have diversified incentives.” As an example, he would like to see greater engagement from Dai holders who are interested in using the stablecoin for everyday transactions.
The hope and expectation are that this new level of involvement will come once supply and demand reaches equilibrium and stabilities do not need to be adjusted as frequently or significantly. At this point, there will be other forms of risk that need to be debated during the weekly Risk and Governance calls, which should diversify the stakeholder base and keep them engaged. These include CDP Risk (allowing people to borrow against other forms of collateral other than Ether), and what he generally calls exogenous risk. Said Mr. Becker, “There is always going to be a new theme that is going to occupy the mindset of that time. It just happens to be the stability fee now”.
Finally, inherent within his comments with me is acknowledgement that by design there is likely always going to be an amorphous element to the MakerDAO community. It was made clear that ultimately the future of MakerDAO is not in the hands of the foundation, but rather the community and its multiple stakeholders. There is probably no better representation of this fact than Mr. Becker’s answer to my question about whether or not MakerDAO is interested in following a model made famous by Munich-based Fidor Bank, which has a very active stakeholder network. He said, “All frames of models, all considerations are being put on the table…We are actually taking our lead from the community as well. Right now, there are so many models being considered that it’s a little bit inundating, but it is giving us a good sense of what folks want from the system in terms of their engagement and also in terms how they wish to contribute as well.”
Conclusion
From these discussions it is clear that there is no singular approach to building an engagement community within the DeFi and blockchain ecosystem, but it is on top of mind for leading players in the space. This fact is especially true given the competition from traditional fintechs. Key figures and stakeholders alike will need to make decisions about the degree of centralization they are comfortable with and ultimately weigh its benefits in terms of speed and new product rollouts against the tradeoffs that come in opaqueness and the need to trust a 3rd party.
