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Investors advise DeFi startups to test out novel use cases and develop solutions

Despite the challenges that the cryptocurrency industry has endured, venture investors continue to view decentralised finance (DeFi) as a lucrative possibility.

Interview with six crypto-focused investors on the future of crypto adoption, their thoughts on DeFi, and the increasing interest in that space from both investors and innovators.

DeFiLlama data shows that from its all-time high of $180 billion in December 2021, the total value locked (TVL) on DeFi protocols has dropped to about $41 billion as of Wednesday. Nonetheless, this hasn’t discouraged entrepreneurs, developers, or investors.

Michael Anderson, co-founder of Framework Ventures, remarked that while “TVL as a metric clearly has its limitations,” it is nevertheless a reasonable gauge of activity in the field. We believe it is feasible that overall market cap may expand in tandem with TVL.

Pantera’s general partner, Paul Veradittakit, agreed. The TVL measure may well approach the $500 billion level in the next five years as DeFi evolves and begins catering to (and capturing share from) its TradFi rivals.

Five of the investors questioned estimated that between twenty percent and fifty percent of current cryptocurrency-related pitches are DeFi-focused. It’s tough to figure out how to differentiate your DeFi firm from the many others that are launching and making investor pitches right now.

“As venture investors, we’re trying to back innovators who aren’t scared to explore and build new goods,” Veradittakit added.

Alex Marinier, founder and general partner at New Form Capital, argues that while increasing use cases are important, they are not the only factor in DeFi’s future expansion. Infrastructural improvements, new regulations, and breakthroughs in finance will all play a role.

According to David Gan, founder and general partner of OP Crypto, “established and crowded” describes DeFi primitives like as automated market makers and lending protocols. “Founders need to reconsider the genuine use cases and pain points of non-crypto/nontechnical people before developing solutions and user experiences.”

According to Marinier, it is important for startups to showcase their cutting-edge technology and the obvious benefits they provide for a particular application. Too many initiatives are trying to sell themselves by saying, “This is X protocol, but on Y chain,” rather than introducing anything really new.

Projects that include strategy or make connections to established institutions also get funding. Anderson argues that, as DeFi expands, so too does the need for its products to provide practical support for established institutions.

Market-altering events in2022, like as the LUNA/Terra ecosystem explosion in May and the collapse of crypto exchange FTX in November, may frighten away institutional participants. So, according to Anderson, we shouldn’t expect these backers for a while.

Because of this, “we’re focused more on initiatives that are thinking about reaching new, more institutional consumers and markets,” Anderson said.

“We’re investing in the building blocks for institutional adoption,” Gan echoed. “These include initiatives that bridge the gap in the completeness of DeFi and protocols aimed at non-crypto consumers.”