Like many other professionals in my industry, I transitioned through fintech before landing in crypto. At some point in the past decade, I was an enthusiastic promoter of the importance of digitising finance. Having lived in Singapore, I saw that transition happening really fast, and so I became an advocate for "everything digital" in banking.
However, although progress was made, it was mostly slow and very specific to niche segments of the industry. For instance, the lowest hanging fruit, generically referred to as payments, seemed to be leading the charge. I still recall talking to bankers in 2007 who had no idea what PayPal was. Then, fast forward less than a decade, and I could move money in and out of my PayPal account directly through a linked bank account.
Other segments gained traction, like retail investment in capital markets and stocks. Services like eToro brought the global markets into our pockets, introducing interesting innovations like copy-trading, which allowed for anyone to copy experienced traders.
Around the middle of the past decade, the rise of Ethereum and smart contracts brought forward perhaps one of the most significant innovations in the industry, which laid the foundation for the advent of Decentralized Finance (DeFi). But before DeFi became a thing, the ICO period pushed Distributed Ledger Technology (DLT) and blockchain to the forefront for bankers, while fintech projects had to decide whether they wanted to embrace this new trend.
It turned out that some segments of fintech stayed fintech, while others migrated to crypto. For example, according to a report by McKinsey & Company published in late 2023, the global funding by fintech segment total value between 2018 and 2022 grew significantly for Embedded Finance and Banking as a Service (BaaS) from $1.2 billion to $4.0 billion (almost 4x) and for SME and corporate services from $2.5 billion to $7.6 billion (over 3x).
Similarly, the global funding growth in percentage by fintech segment saw the same two segments attracting 36% and 32% more funding, respectively. Conversely, lending, on the one hand, and operations and infrastructure, on the other hand, lost steam under fintech and migrated to blockchain.
Specifically, lending, which was the biggest segment in terms of market volume at $9.9 billion, grew to only $11.6 billion between 2018 and 2022, while operations and infrastructure dropped from $3.9 billion to $3.5 billion. In terms of funding in percentage, lending only attracted 4% more funding during the same period, and Operations and Infrastructure lost 3% of the investments.
At the same time, with tremendous acceleration in 2021, lending protocols on blockchain were flying high. In February 2021, Uniswap had a market cap of almost $6.9 billion and AAVE $3.97 billion, representing 33.52% and 19.32% of the DeFi industry, respectively.
The Uniswap innovation of Automated Market Makers (AMM) not only made them the most popular protocol in the industry but opened a new avenue for developers to build products without a traditional order book. At the same time, AAVE enabled ultra-short duration, uncollateralised flash loans designed to be integrated into other products and services, thus allowing incredible flexibility for anyone to build products at the back of their technology.
Overall, it is clear that at some point toward the second part of the last decade, a partition happened between Fintech and Blockchain, which resulted in the origin of DeFi.
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