Interview: DeFi Hasn't Reached Its Full Potential Yet, Insights from Syndicate

The world of decentralized finance (DeFi) has been experiencing rapid growth, but according to Will Papper, co-founder of Syndicate, there are significant technical hurdles that are nudging the sector back towards centralization. As more funds flow into the cryptocurrency market, it raises questions about whether this capital reinforces the centralized systems that DeFi aimed to disrupt.

Key Takeaways

DeFi has seen cycles of growth, transitioning from centralized exchanges to a more decentralized landscape and now facing a re-centralization issue.
Building decentralized systems that can match the performance of centralized exchanges is a major challenge for the industry.
Technical improvements like vertical and horizontal scaling are essential for enhancing performance while maintaining decentralization.
Genuine decentralization is defined as a system where no single entity can unilaterally modify network rules, ensuring a secure foundation for community ownership.
The growing involvement of institutions in DeFi is bifurcating the ecosystem, benefiting large-cap tokens while smaller projects struggle.
Real adoption will come when institutions engage more with on-chain operations, moving beyond mere exposure through financial products like ETFs.

Syndicate's Will Papper discusses DeFi's challenges

In an exclusive interview with crypto.news, Papper elaborates on the ongoing struggle between decentralization and efficiency, shedding light on the intricate challenges that need to be solved in the crypto landscape.

The Evolution of DeFi

Crypto.News: How do you view the growth of DeFi in recent years? Is the ecosystem moving toward more decentralization?

Will Papper: Great question! DeFi has evolved in cycles. Before 2020, centralized exchanges primarily dominated, and DeFi was still in its infancy. Early projects like EtherDelta and MakerDAO existed, but the sector was largely centralized.

I consider the period from 2022 to 2024 (depending on how you define it) as the golden age for decentralized DeFi. Innovations like Uniswap V3 (UNI) greatly improved capital efficiency, while Curve provided strong liquidity for stablecoin transactions. Platforms like Velodrome and Aerodrome incentivized liquidity more directly. During this time, decentralized exchanges began to compete more effectively with centralized platforms.

However, recently we've seen a shift. Projects such as Hyperliquid (HYPE) and other similar "hyperexchanges" are re-centralizing aspects of the DeFi ecosystem. Many of these are closed-source and use off-chain operations, complicating the perceived level of decentralization. If a single entity controls the code, they have the power to make unilateral changes, potentially undermining decentralization.

The real task ahead is to create systems that offer the same performance as centralized exchanges while also being decentralized. We're actively working on this, but we haven't fully achieved it yet.

Achieving Performance and Decentralization in DeFi

Crypto.News: Technically, what will it take to combine high performance with decentralization in DeFi?

Will Papper: Vertical scaling can be part of the solution. For instance, Solana (SOL) allows for on-chain order books that provide high throughput. Ethereum is also advancing with initiatives like MegaETH and contributions from teams such as Rise.

However, there's still a huge performance gap between centralized and decentralized order books. Centralized exchanges can cancel orders in sub-milliseconds, while even the fastest decentralized options take around 200 milliseconds, which adversely impacts profitability.

Horizontal scaling is equally important. It helps to reduce downtime risks, which are particularly evident with platforms like Solana, where users have occasionally faced difficulties submitting transactions. Downtime significantly affects trading profits.

Moreover, horizontal scaling grants greater flexibility in validation rules. Rather than centralizing everything on one blockchain, we’ll see applications tailored to specific needs. Some clients are interested in features such as priority cancellations or specialized validator placements to enhance performance.

I believe we'll increasingly observe platforms like Hyperliquid that are finely tuned for specific applications, as general-purpose chains may not achieve the required performance levels.

Defining Decentralization and Community Ownership

Crypto.News: How do you characterize decentralization and community ownership? What are the tangible benefits for stakeholders?

Will Papper: Decentralization, to me, means no single entity can alter the network rules independently. This is crucial for security; if one party can make changes without consent, they might manipulate funds or erode trust.

For example, Hyperliquid's validator set, while seemingly decentralized, operates on a closed-source basis. This allows a single entity to deploy updates without validator awareness, which poses significant risks.

Community ownership suggests the community has economic stakes in the network—this can include direct fee sharing or mechanisms like buy-and-burn, which contribute to decreasing token supply. The core is community members gain directly from the network's success.

When decentralization and community ownership are combined, they create an effective model. A decentralized network assures participants that the economic structures will not alter unexpectedly, preventing disillusionment. A truly decentralized system ensures stakeholders have an immutable claim on the value created by the network.

The Impact of Institutional Involvement in DeFi

Crypto.News: How do you view the increasing participation of institutions in DeFi? Are we already witnessing its effects, and what might future trends look like?

Will Papper: The context of institutional involvement matters. Some in traditional finance are entering crypto through ETFs, while others are utilizing stablecoins and tokenized real-world assets (RWAs).

Regarding traditional capital engaging in crypto-native activities—such as ETFs or hedge funds acquiring BTC or ETH—this has already made a significant entry into the market.

Notably, there's a sentiment disconnect. Users focused on major assets like BTC and ETH often perceive the market as healthy. In contrast, those dealing in lesser-known tokens may call it the most challenging market they’ve encountered. Analysis shows that only the top five non-stablecoin assets are faring well, while many others are struggling.

Flowing institutional capital primarily enters a small selection of crypto assets—predominantly BTC, ETH, and possibly a few others. This implies that capital rarely engages with lesser-known tokens or on-chain liquidity, leading to a market disparity.

This scenario results in a division: large-cap tokens benefit from influxes of capital, while smaller assets suffer from dwindling liquidity and interest.

Institutions Utilizing Crypto for Traditional Financial Activities

Crypto.News: What about institutions leveraging crypto for conventional financial use?

Will Papper: This is where I am most excited. When institutions adopt crypto for traditional purposes like stablecoin payments or RWAs, it facilitates genuine adoption and efficiency.

For example, at Syndicate, we extensively employed stablecoins during our initial fundraising phase in 2021. We handled most operations on-chain using stablecoins, which proved to be quicker, cheaper, and more efficient than traditional banking processes.

As more companies begin to hold and use stablecoins on-chain, they move closer to deeper participation in the crypto ecosystem. Initially, they might make stablecoin payments to a few vendors, then expand to paying staff, and eventually engage with crypto-native applications by utilizing protocol tokens or minting NFTs.

Once a treasury is on-chain, the path to exploring the broader crypto landscape becomes significantly easier. This orientation toward on-chain capital is, in my view, key to sustainable long-term growth.

Curiously, the ETF phenomenon—where institutions remain exposed to crypto off-chain—has caused price disparities between large-cap and smaller tokens. However, when money flows legitimately onto the blockchain, it enhances liquidity, fosters market engagement, and encourages actual ecosystem activity.

The Future of Access to Altcoins with ETFs

Crypto.News: With around 150 crypto ETFs in development, do you think access will eventually extend to altcoins?

Will Papper: Yes, on a fundamental level, if investors can effortlessly shift between ETF assets like DOGE, ARB, or other altcoins, overall access will broaden. The introduction of token-specific ETFs could reduce capital concentration among a few major tokens.

However, the model still feels incomplete. I became interested in crypto back in 2013 largely due to ideals like decentralization and community ownership. My past in mesh networking demonstrated how devices can communicate without central servers, which fueled my enthusiasm for building decentralized systems.

If every crypto asset is available through the stock market via ETFs, it might improve access but risks overlooking the core distinctions of the crypto space. The truly exciting future involves traditional capital moving on-chain, engaging in stablecoin use, RWAs, and decentralized protocols rather than just leveraging the historical financial framework.

I’d welcome a landscape with increased ETF offerings for altcoins; it’s certainly better than nothing. Yet, I hope this development doesn't inhibit genuine engagement with on-chain operations, as that is where true participation and innovation originate.

Understanding the Project’s Community in Crypto

Crypto.News: What constitutes a project's community? Are we referring to token holders, users, or developers?

Will Papper: At its core, a community consists of token holders. Ideally, effective token design would convert users and developers into token holders as well. This alignment means that individuals who actively engage with and contribute to the network also have a stake in its success.

Ethereum serves as a good illustration. Users need ETH for transaction fees, and developers hold ETH in their treasuries for deploying contracts or managing infrastructure. As many NFT sales and token launches are priced in ETH, this naturally fosters alignment—by using the network, participants accumulate and maintain the asset.

However, we’ve increasingly shifted toward more user-friendly designs that separate usage from token exposure. For instance, certain applications impose fees in USDC but covertly exchange it for protocol tokens. While this enhances user experience, it can diminish the connection between engagement and ownership.

The concept of community ownership flourishes when active participants have economic ties to the network's achievements. If users and developers lack a stake, token holders may turn into passive shareholders, dissociated from the ecosystem's activities.

Addressing Concerns of Short-Term Investor Mindset in Crypto

Crypto.News: Observing social media discussions, it seems short-term price fluctuations dominate, leading retail investors to behave like shareholders. How do we prevent crypto from emulating the traditional financial system?

Will Papper: This is indeed a valid concern. Observing crypto discourse on platforms like Twitter or Telegram, it's apparent that many discussions revolve around quick profits and price speculation. Interestingly, the top outcomes in crypto are products of longer-term holding. Most individuals who traded BTC or ETH actively over the last decade have performed worse than those who simply held for five or ten years.

Similar patterns are observable in other markets—stock traders often underperform compared to long-term holders. Crypto follows this trend; while volatility breeds short-term strategies, those approaches are generally unproductive.

To avoid crypto merely replicating older financial systems, we need to focus on sound token design. An effectively structured token should ensure that network utility drives demand, allowing price to reflect true adoption rates.

Ethereum's interactions during the 2021 cycle exemplified this. Investors were willing to pay high transaction fees, and ETH incorporated effective burn mechanics through EIP-1559, directly linking usage to token value.

Unfortunately, many current tokens are misaligned with their fundamentals. Some blockchains boast bilious fully diluted valuations (FDVs) but generate little actual revenue. Even significant increases in usage fail to make notable impacts. Until this disconnect is rectified, speculation will prevail, and token holders may act more like transient shareholders than committed stakeholders.

Markets remain irrational, and I have long anticipated a rational shift since 2013. For instance, Steemit—a crypto platform with a small user base—was at one point valued higher than Reddit, showcasing how often distortions occur.

As long as tokenomics are estranged from real utility, peculiar behaviors will persist. If projects emphasize fundamentals, such as utility, user engagement, and ownership, the financial model can represent something genuinely novel rather than a mere replication of a Web3 version of Wall Street.

Unexplored Trends in the Crypto Landscape

Crypto.News: To conclude, are there any emerging trends that deserve more attention within the crypto discourse?

Will Papper: One key trend is the developer experience. Most people aren't aware of the real challenges that come with building crypto apps. Even tasks that sound simple—like processing a payment through Stripe while instantly minting an NFT—can become quite complex with many potential points of failure in the transition from Web2 to Web3.

We are focused on overcoming these hurdles: how to enable developers to create the applications they desire while simplifying the complexities involved in validators, message passing, and on-chain mechanisms. Ideally, development teams should concentrate on user experience and core functionalities, while the blockchain handles the intricate technical details seamlessly.

Another underrated trend is on-chain gaming. Although the narrative in 2021 centered on asset transferability across games didn’t quite materialize, the core concept still holds considerable promise. Encoding asset issuance rules on-chain provides transparency and permanence, unlike traditional games where sudden modifications can eradicate the value of in-game items overnight.

The in-game asset market is vast, and people continue to spend billions on these items. I believe that governance through smart contracts is superior to decisions made by companies. Even without achieving the interconnected gaming landscape we envisioned, crypto still has a tremendous opportunity to enhance gaming economies.

The Value of In-Game Assets

Crypto.News: Do you believe there should even be a multi-billion-dollar market for pixels?

Will Papper: I view in-game assets similarly to luxury goods or art. Humans have historically allocated money to possessions that signify identity, status, or affiliation. Gold has maintained its cultural significance for millennia; skins and NFTs serve a comparable function.

However, I hope that crypto doesn't solely depend on status-driven narratives. Ideally, these would represent a minor element of a much larger ecosystem—one where capital flows on-chain, ownership is widely distributed, and networks focus on real utility.