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

Although the crypto ecosystem has faced its fair share of bumps, venture capitalists are still bullish about the space and continue to look at decentralized finance (DeFi) as a promising opportunity.

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

The total value locked (TVL) on DeFi protocols has fallen roughly 77% from all-time highs 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 the space.

“While TVL as a metric certainly has its flaws, we think it's still a decent measure of activity in the sector,” said Michael Anderson, co-founder of Framework Ventures. “As TVL increases, we also think it's possible that total market cap could follow.”

Paul Veradittakit, general partner of Pantera, echoed that sentiment. “Naturally, we expect that in the next five years, as DeFi matures and begins catering to (as well as capturing share from) its TradFi counterparts, the TVL metric could easily surpass the $500 billion mark.”

Anywhere from 20% to 50% of crypto-related pitches today 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 stand out.

“As venture investors, we’re looking to back innovators who are not afraid to experiment and create new products,” Veradittakit said.

But DeFi's growth will depend on more than just rising use cases, according to Alex Marinier, founder and general partner at New Form Capital. “It will also be influenced by developments in infrastructure, regulation and financial innovation.”

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

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

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

Unfortunately, institutional players might be spooked by the market-changing events in 2022, like LUNA/Terra ecosystem exploding in May and crypto exchange FTX collapsing in November. So these investors are unlikely to return for a few years, Anderson said.

“As a result, we’re focusing more on projects that are thinking about addressing new, more institutional users and markets,” Anderson added.

Gan agreed: “We're investing in the building blocks for institutional adoption, projects that fill the gap in the completeness of DeFi and protocols geared toward non-crypto users.”