DeFi trends: SEC Impact on Mass Adoption, Crypto Gambling, and More

Trends in DeFi with Patrick from Dynamo DeFi

This post is a summary of the Twitter Spaces I held with Patrick from Dynamo Defi on February 24th 2023. We covered his views on the latest DeFi trends, challenges, and opportunities.

We dived into the impact of the SEC on the DeFi space, exciting opportunities in the DeFi ecosystem, the potential for crypto gambling, and more. We also explored the challenges of onboarding non-technical users to the world of crypto and DeFi, and the legacy that he (as a crypto educator) hopes to leave behind.

Hopefully, you’ll enjoy this different post on a bit of a deep dive into the ever-evolving world of DeFi and Patrick’s opinions.

You can listen to the original spaces on our youtube account here https://youtu.be/Ig7-4Dih020

DeFi Trends

Hot topics

One of the hottest topics in the DeFi space right now is the emergence of layer 2 roll-ups. Platforms such as Arbitrum and Optimism have been gaining a lot of traction, with many people anticipating the upcoming ZKVM release. This is significant because layer 2 solutions offer faster and cheaper transactions than their layer 1 counterparts, and this could be the key to unlocking mass adoption. In addition to roll-ups, liquid staking derivatives and the Shanghai upgrade have also been generating a lot of buzz in the community.

On the other hand, the DeFi space is still hurting from the CFI explosion in 2022, and it’s unclear whether the sector is attracting any new participants or if it’s just a game of liquidity hot potato. The SEC has also been more active in the early part of the year, which is causing some concerns in the community. All things considered, the DeFi trends this year are a mix of potential breakthroughs and challenges that will need to be overcome for widespread adoption.

SEC Impact on Mass Adoption

One of the major challenges that the DeFi space is facing is the impact of SEC actions.

Patrick sees that the regulatory environment is clearly still evolving, so it’s still somewhat unclear how this will affect the sector. There is a lot of uncertainty around whether tokens will be classified as securities, and how this will affect their trading and customers’ investment plans. However, one bold prediction Patrick made was that a top DeFi project by market cap may do a redemption of their governance tokens in response to regulation. This would involve taking the governance tokens off the market and either offering treasury in return or finding a way to delist them.

Despite the challenges, he and plenty of the DeFi space remain optimistic about the potential to revolutionize finance and bring financial services to those who have been excluded from traditional banking systems.

Deeper on the Regulatory Environment in DeFi and Crypto in the US

It’s no secret that the regulatory environment in the US has been a challenging space for DeFi and crypto businesses in recent years. The uncertainty around regulations has caused many projects to steer clear of the US market, and for good reason. With a lot of enforcement rather than guidance, making examples of people seems to be the way it’s going right now.

The issue is that there seems to be a fundamental lack of understanding on the part of regulators in terms of how difficult or even impossible it is to censor crypto. There’s no one you can go to and say, “Don’t let people set up wallets, don’t let people receive transactions.” But because of that, regulators are not thinking through these unintended consequences. This could lead to an unintended consequence where people are forced to build elsewhere, as we’ve seen with FTX setting up in the Bahamas. In the end, it’s up to regulators to adapt and understand that crypto is here to stay and that making examples of people is not the way to go.

Exciting Opportunities in the DeFi Space

DeFi is always evolving and changing, with new projects and opportunities appearing all the time. One project that’s been a focus for Patrick is the upcoming launch of Filecoin smart contracts in a few weeks. Filecoin’s DeFi ecosystem is actually going to be underpinned by the fact that Filecoin has real demand for its decentralized storage.

Another area that obviously has his attention is the Coinbase L2: Base, which he feels is something that many people are underestimating (at the time of recording). Although the initial interest pump in terms of Coinbase’s token has mostly worn off, the potential is there for Base to produce high returns in the future and onramp millions into DeFi.

Coinbase’s L2 rollout on Ethereum brings an important opportunity for Ethereum’s scalability and decentralization efforts. Coinbase already has 100 million KYC customers signed up, and it only needs to onboard 2–3% of these customers to 2–3x the current DeFi activity. This number will dwarf all other chains, including Arbitrum.

Base is built on the OP stack. The OP stack is at the heart of Optimism’s vision of a super chain — a whole network of layer twos — that are interoperable with a mesh system. This is a cohesive vision for scaling Ethereum, and it makes it harder for another smart contract platform to win. However, there are still issues with centralization and roll-ups that need to be resolved.

Patrick also thinks we’re going to see some seriously highly used, powerful GambleFi platforms at some point. The ability to do borderless crypto gambling seems a clear use case in his eyes.

Finally, of course, he remains very bullish on Arbitrum. Although it’s no longer as asymmetric as it was, it’s still the primary ecosystem he’s playing in. He found it useful when he first started using it, and that’s ultimately a core thesis on where he chooses to invest — in things that he finds useful.

Death of Sidechain by Large Exchanges

As others will follow suit, Coinbase’s L2 rollout on Ethereum could mean the death of sidechains by large exchanges. It is more likely that these will be launched as optimistic rollups that provide decentralized, bespoke use cases with the more inherent decentralization that the Ethereum stack provides.

This move also means renewed interest and investment in decentralized roll-ups — give it another 12 to 18 months, and it will be a more or less solved issue.

Coinbase has two major advantages — first, they already have 100 million users they can direct off the platform, and second, they can waive the fee if users withdraw to Base. However, Coinbase’s lack of a coin for Base raises the question of how to incentivize users, especially if other chains offer higher incentives.

Gambling on Ethereum

The gambling space on Ethereum brings an important opportunity to showcase what the platform can do separately from the rest of the crypto world. Gambling can be separated into two categories: casino-style games and sports betting.

In terms of casino-style games, the space needs to be more straightforward and simplified for people to adopt it. This can be done by improving user experience, especially in holding their assets, as there have recently been some reports of lost assets.

Sports betting involves more complexity, as it involves enabling automated sports trading protocols that allow people to bet and trade without the need for “grey area” bookies. This will provide a more transparent, ethical, and fair system for people to bet on sports.

The Potential for Crypto Gambling and Sports Betting

Cryptocurrency has already proven its use in industries such as casinos and online poker. With its ability to handle regulatory issues and payment problems, crypto has made the gaming experience much easier. Crypto referral programs also make sharing referral links much simpler.

However, the expanded use case for crypto here is expanding into sports betting where there are already significant issues regarding accessibility. Crypto is an ideal solution to this problem, as it is tailor-made to solve such issues. Successful crypto sports betting sites such as Rollbit are already attracting more users than traditional non-gaming major dApps.

Regulation and Crypto Gaming and Sports Betting

With the possibility of a regulatory crackdown on crypto gambling and sports betting, it is important to consider crypto’s potential to make regulation more difficult. Traditional casinos faced strict regulations in different countries, but crypto is capable of skirting these regulations quite swiftly. As a decentralized solution, it is becoming increasingly difficult to censor anything related to crypto gaming or betting. Therefore, creating unstoppable gambling may not be far off.

The Resurgence of Alternative Layer Ones

Creating DeFi ecosystems that fulfill specific use cases will undoubtedly make alternative layer ones valuable. In some cases, prioritizing the end-user experience over decentralization is essential, especially for gaming applications that involve microtransactions. Nevertheless, it feels key to good user experience to abstract the end-user from the chain they are using, using different chains for different applications, and connecting them through cross-chain messaging systems.

Challenges of Onboarding Non-Technical Users to Crypto

Broader mass market appeal

DeFi has vast potential as a new financial ecosystem, but what aspect of it has mass-market appeal? Two of the most interesting aspects of DeFi in terms of mass-market appeal are payments and tokenized incentive programs. Payments, especially stablecoin transactions that are used for cross-border payments, are widely used in the crypto space. It’s also one of the few crypto applications that are being used for purposes other than speculation. stablecoins provide a fast and convenient way to send and receive money cross-border, and it’s more secure than traditional bank transfers.

Tokenized incentive programs also have enormous potential in the DeFi space. Many projects are building rewards programs on-chain, combining smart contracts and DeFi with NFTs. Unlike traditional rewards programs, these incentives are more attractive to users due to their potential to provide more value. The DeFi infrastructure makes it possible to extract value from these incentives, and also to swap and trade them on-chain.

However, the adoption of loans and mortgages on DeFi platforms may take several years longer than people expect. There are regulatory barriers to cross-border loans, and the legal and regulatory framework is still being developed.

The Gap Between Technical and Non-Technical Users

Crypto enthusiasts who have been involved in the sector for a while tend to forget how daunting it can be for non-technical users. The process of accessing different chains or protocols can be bewildering for people less familiar with blockchain technology. It’s crucial to recognize the gap between technical and non-technical users and offer adequate educational content to bridge the divide. The challenge for crypto educators is to simplify complex systems and make them accessible to a wider range of people.

User Experience

The user experience on DeFi platforms remains challenging, but it’s expected to improve with time as new tech solutions such as account abstraction are adopted.

Adoption to date has been achieved because of the potential gains on the. table. People put up with the complexity of crypto and DeFi especially to access a system that they find appealing. Not to mention, that something about the underground aesthetics of these systems appeals to people who feel like they’re part of a counter-culture. Successful projects have managed to capture that countercultural aesthetic and so the appeal is not only in being able to make money from them but also in the feeling of being part of something different.

But if we’re ever to break out of today’s niche, the challenge for educators, and protocols alike is to demonstrate the appeal of crypto and DeFi in a way that’s accessible to everyone.

Legacy Goals for Patrick

The legacy that Patrick (as a crypto educator) would like to leave in crypto is to help tens of thousands of people onboard into this new and exciting world by providing valuable content. The challenge he sees for crypto educators like him is to offer educational content that’s accessible and engaging, allowing people from different walks of life to develop an understanding of blockchain technology. Eventually, getting on-chain will be as normal as being online, and crypto educators will have contributed to making that transition smoother.

Wrapping up

If you want to hear the full interview you can access it here https://youtu.be/Ig7-4Dih020 and keep an eye out for more of these write ups over the coming weeks