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Trends Watch: Investing in DeFi

Dec 1, 2022

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Sunil Rao, General Partner, Arkana Capital.

What is your outlook for investing in DeFi?

DeFi is the platform on which the future of finance will be built. Of this, there is no doubt.

However, the age of DeFi is just beginning and it remains an ecosystem with applications being built on a technology that is new, being tested in real time, incessantly evolving and operating in an ambiguous regulatory environment with significant noise around it. I would draw parallels to a growing child that is teething.

DeFi therefore requires sober consideration. It requires the creation of a safe environment for unbounded enthusiasm to allow for controlled and sustainable growth, overseen by experienced individuals who are focused on creating sustainable use cases with capital allocation based on careful consideration and due diligence.

And achievable sustainable and high risk adjusted returns is available to those willing to look at DeFi using a risk management and fundamental assessment lens.

As such, now is the right time to be in DeFi – whether you choose to invest in start-ups building the DeFi ecosystem or directly/indirectly participating within the ecosystem. Some of the best use cases are yet to be introduced. You need to play now to leverage on the opportunities that they will present.

Why will DeFi transform the financial system?

Because it can solve the six inherent problems of the traditional financial system: inefficiency, limited access, inability to scale quickly, opacity, centralized control and interoperability.

And given that it is open source, barriers to innovators are lower, which fosters a spirit of entrepreneurship, where founders will be able to address and provide scalable solutions to an identified financial need/gap.

Also, while stakeholders do not see it as yet, blockchain will allow for an effective and real time regulatory control environment. With clear rules and an enabling regulatory environment in place, cost of compliance would be less, which in itself would make the traditional finance ecosystem obsolete.

Where do you see the greatest opportunities and why?

Tokenization. The technology allows for virtual and physical assets to be turned into “tokens” that act as stores of value and can be used in financial transactions. Combined with rapidly improving smart contracts, falling transaction and execution costs, transparency, open transaction history and rule finality, it will deepen and broaden stakeholder loyalty, engender trust, increase engagement and provide increasing access to multiple return avenues.

What are the greatest challenges you face and why? 

In the market, we see irrational enthusiasm, irrational fear, lack of available capital supporting good DeFi projects, regulatory ambiguity, a continued focus on anonymity, lack of effective governance and naïve narratives being used. The ecosystem needs to be led by a stronger value system and ethos and we need to look beyond the noise that is currently present in the ecosystem.

What keeps you up at night?

The blockchain technology is amazing and it offers a blank slate to anyone looking to address one or more of the many financial constraints and issues. And we have not even scratched the surface of what the technology is capable of.

What keeps me up is thinking about all the endless applications of the technology and how I can contribute to its sustained and credible growth.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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