DeFi startups need to experiment with new use cases and build solutions, say investors • MastStatus

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While the crypto ecosystem has had its fair share of bumps, venture capitalists are still optimistic about the space and continue to see decentralized finance (DeFi) as a promising opportunity.

MastStatus surveyed six crypto-focused investors about the path ahead for crypto adoption, their sentiment toward DeFi, and how focus in that subsector (by both investors and founders) is growing.

The total value locked (TVL) on DeFi protocols is down about 77% from an all-time high of around $180 billion in December 2021 to about $41 billion on Wednesday, according to DeFiLlama data. But that hasn’t stopped founders, developers, and investors from diving into space.

“While TVL certainly has its shortcomings as a measure, we think it is still a decent measure of activity in the industry,” said Michael Anderson, co-founder of Framework Ventures. “As TVL increases, we also think it’s possible that total market cap will follow.”

Pantera general partner Paul Veradittakit echoed that sentiment. “Of course, over the next five years, as DeFi matures and begins to cater to (and gain market share from) its TradFi counterparts, we expect that the TVL metric could easily cross the $500 billion mark.”

Anywhere from 20% to 50% of today’s crypto-related pitches are DeFi-focused, five of the investors surveyed said. With all these DeFi startups launching and pitching to investors, it’s hard to determine what it takes to get noticed.

“As venture investors, we want to support innovators who are not afraid to experiment and create new products,” said Veradittakit.

But DeFi’s growth will depend on more than increasing use cases, according to Alex Marinier, founder and general partner at New Form Capital. “It will also be affected by infrastructure, regulatory and financial innovation developments.”

In general, DeFi primitives like automated market makers and lending protocols are “established and busy,” said David Gan, founder and general partner of OP Crypto. “Founders need to go back and think about the real use cases and pain points for non-crypto/non-technical users, then build solutions and user experiences.”

Founders should emphasize unique technology and clear benefits for a specific use case, Marinier said. “Too many projects simply position themselves as ‘X protocol, but on Y chain’, without offering anything truly innovative or new.”

Investors are also interested in projects that strategize or connect with institutional players. As DeFi grows, so does the need for its products to realistically house institutions, Anderson said.

Unfortunately, institutional players may be shocked by the market-changing events of 2022, such as the explosion of the LUNA/Terra ecosystem in May and the collapse of crypto exchange FTX in November. So these investors are unlikely to return for years to come, Anderson said.

“As a result, we’re focusing more on projects that think about appealing to new, more institutional users and markets,” Anderson added.

Gan agreed: “We are investing in the building blocks for institutional adoption, projects that fill the gap in DeFi completeness, and protocols aimed at non-crypto users.”

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