What's brewing in web3 during the crypto winter?

Mauricio Magaldi Global Strategy Director, Crypto

4th August 2022 • 4min read

At this point we can all agree that the financial market as a whole has gone through a period of lows. Paired with increased inflation (even in developed countries), and the US confirming a recession, things seem to have really taken a turn for the worse - the so-called bear market.

And it seems that during a bear market, people adopt an ostrich mindset: bury their heads in the sand and wait for a recovery. But despite the overall mood, there are lots of opportunities during a bear market that go way beyond investing or speculating, and they can even help to propel the next bull run.

To no one’s surprise, mainstream media is having a field day with the scary, clickbait-y headlines, bringing ‘experts’ for live interviews, and conflating the many things happening in the market with DeFi. Let’s be clear: the major flops we witnessed recently were not at all a result of decentralisation. Names like Celsius, Three Arrows Capital and Galaxy were, in fact, centralised organisations that - each in their own way - gathered investor money and leveraged to invest in failed, and also speculative, DeFi protocols.

Let’s be clear: the major flops we witnessed recently were not at all a result of decentralisation.

To boot, in Bitcoin land there were major sellouts in the last quarter. Market darling Tesla sold over 900m USD worth of BTC, the Government of Finland sold 1900 BTC (recovered from hacks and scams), and the early fiasco of Terra/Luna released 33,200+ BTC into the open in a failed attempt to defend their Stablecoin peg. All of these combined factors ultimately helped to tank the market.

When the ‘up only’ season ends, it usually highlights which business models are sustainable and which ones aren’t, which problems have been solved and which ones emerged. Warren Buffet once said that “only when the tide goes out do you discover who's been swimming naked”, and that’s exactly what we’re witnessing right now.

But amid this high degree of fear (Fear and Greed index hit 6 - extreme fear - on June 19th), three areas of real business are being actively developed by builders and entrepreneurs: DeFi insurance, DeFi with real-world assets, and alternative industries.

DeFi insurance

As with the traditional insurance industry, DeFi insurance aims to protect individuals and companies from an activity’s inherent risks, by charging a premium and providing a payout in case the covered events come to pass. In DeFi, these events are smart contract malfunction, protocol exploits, hacks, impermanent loss and others.

In truly decentralised fashion, the funding for DeFi insurance platforms is sourced from various liquidity providers, who can draw returns from the premiums paid by beneficiaries.

As an example, DeFi decentralised application (DApp) Nested Finance has recently partnered with DeFi insurance platform Nexus Mutual to protect Nested investors from losing their capital in case of an adverse event. More importantly, this helps to send the message to the market that both companies are serious about investor money, which can go a long way to minimising the ‘old wild west’ perception, which detractors use to define the whole cryptoeconomy.

In true decentralised fashion, the funding for DeFi insurance platforms is sourced from various liquidity providers, who can draw returns from the premiums paid by beneficiaries.

This obviously opens lots of opportunities for incumbents, especially those already involved in cyber insurance (ransomware attacks, hacks and leaks), who can now deploy their expertise in preventing and recovering from attacks in the decentralised infrastructure.

Real-world assets

The term ‘DeFi Mullet’ was coined by the podcasters at BanklessHQ and refers to financial services resembling a fintech in the front, with DeFi infrastructure in the back. The idea is that financial services should actively be used to solve real-world problems while the infrastructure can be as efficient as possible. Build the UX, solve the problem, reap the rewards.

This also means that traditional financial institutions can improve their own products and services by using DApps. They are more efficient, accessible, transparent and interoperable, solving existing problems in ways that were previously impossible, and new problems that were previously impossible to solve.

Some examples of platforms building the DeFi Mullet include Goldfinch and Credix, which use decentralised infrastructure to borrow money from investors in developed countries with low interest rates and lend to small and medium businesses in emerging markets where interest rates are high, and sometimes unaffordable. In this win-win-win arrangement, the investors earn higher returns than at home, the borrowers pay lower interest rates, and the platform reaps a cut of the spread.

Another example of dealing with real-world assets in decentralised infrastructure is MakerDAO. The issuer of the DAI Stablecoin currently has five vaults set up to handle some interesting use cases. Through Centrifuge, they’re deploying 18.3m DAI for real estate-backed loans by New Silver lending, 5.3m DAI for a Special Purpose Vehicle established by Fortunafi, 1.9m DAI for tokenised freight invoices from Consolfreight, and 1.8m DAI for short-term credit receivables from Harbor Trade. Through 6s Capital, they’re offering 14.2m DAI for commercial real estate developers in the US.

Alternative industries

With web3’s ownership primitive at the forefront of many applications and use cases, it’s no wonder that some alternative industries have embraced decentralisation to try and subvert pre-existing logic. Ownership in web3 is changing the landscape so much that the US copyright and trademark offices launched a joint effort to study the impact of NFTs on IP rights.

With web3’s ownership primitive at the forefront of many applications and use cases, it’s no wonder that some alternative industries have embraced decentralisation to try and subvert pre-existing logic.

Art, music, film and even social networking have been experimenting with new forms of funding, interaction and engagement. When combined with the ability to trade and programme their assets, these industries are redefining what is possible.

Provenance of art is now fully provable, leading to more liquidity, and programmable, allowing artists to be continuously paid as art is traded across the market. As an artist, you can even mint your own NFT via the Manifold smart contract.

Music rights recover their true meaning, allowing musicians and fans to share the upsides of a successful career. Examples include Royal, Water & Music and TuneTraders. Token holders not only fund and own the song, but can also get paid corresponding royalties.

In a very meta-reference, the Ethereum movie, ‘The Infinite Machine’, has initially been funded by fans via NFT purchases. NFT holders are listed as executive producers, will be credited in the movie, and can enter a draw to appear as extras during the film shooting. This has been so successful that Ridley Scott’s company, Scott Free Productions, will produce the feature along with Versus Entertainment.

If you entered crypto just for its speculative nature, you’ll be missing a complete disruption in multiple industries. Refusing to see the tech for what it is - a programmable, decentralised, permissionless public infrastructure - can expose you and your companies to the risk of obsolescence, maybe from actors you won’t even realise. But it’s still early days. There’s a lot to build if you can blend curiosity and scepticism to solve real-world problems.