Each month, Jasper De Maere, Head of Research at Outlier Ventures, will zoom in on trends and events happening in cryptocurrency and the broader ecosystem across public and private markets.
A new trend called OpenFi (Open Finance) is gaining momentum in the financial corner of Web3. Leveraging the core DeFi infrastructure built last cycle (2019), OpenFi aims to live up to the original fintech promise of having fairer, more accessible financial services. By integrating smart wallets and modular dApps into its front-end, OpenFi is expected to drive the next wave of consumer adoption within the realm of decentralized financial services.
Fintech, the integration of financial services with technology, has been around for much of the 20th century, but only truly accelerated around 2007-2008. During this time, the launch of the iPhone marked the beginning of the mobile-first era. At the same time, the global financial crisis further eroded confidence in the traditional banking system. These two trends combined marked the birth of the modern fintech industry as we know it. Today, fintech companies continue to transform financial services and are maturing to the point where they are challenging incumbents as evidenced by for ex. Revolut’s freshly obtained UK banking license last week.
In order to truly disrupt incumbents, fundamentally different products need to be offered by challenger fintech players. And while I think the existing fintech offering is miles better than traditional financial services, fintech’s potential today is limited by the foundational technology on which it is built. Today, fintech is making use of similar centralized, imperfect databases as the incumbent banks, insurers and asset managers to coordinate their services and products. Today, fintech brings efficiency mainly by focusing on innovation in the application layer of their products, driving intermediary costs down and increasing product outreach. Instead of fundamentally changing the way financial services are offered, I believe they are optimizing at a local maximum, working with the tools available. To reach its full potential, the fintech industry needs to adopt new database and back-end technology like blockchain technology which unlock peer-to-peer transactions, automated smart contract execution and transparency.
Enter OpenFi (Open Finance), the next leg of fintech that leverages principles of blockchain technology to combine the functionality of the traditional financial system with the permissionless, modular, and ownership-centric benefits of decentralized finance. OpenFi promises to further increase the modularity and access to the financial system, improve liquidity, and make it overall more efficient from a cost and innovation perspective.
And what about DeFi (decentralized finance)…? DeFi and OpenFi are complementary, making up different parts of the financial technology stack. OpenFi focuses on the front end, connecting DeFi’s core infrastructure to clients by coordinating decentralized financial services (saving, earning, investments, payments, remittances) in a user-friendly way. In the meantime, DeFi focuses on the back-end of the stack. It serves as the infrastructure layer that enables peer-to-peer trading of digital assets, which everyone remembers was one of the big breakthroughs of the last cycle. And while today over $100 billion of assets are locked in these protocols, consumer-friendly functionality and as a result, widespread adoption is still missing in DeFi today. To bring the peer-to-peer capabilities of DeFi to the average consumer, OpenFi aims to orchestrate the front end, integrating various financial services into a seamless offering that rivals and surpasses traditional and fintech products.
In practice, OpenFi starts from a user-controlled account or wallet that is fully KYC-compliant, holding digital assets like stablecoins, cryptocurrencies, and STOs. From there, users can access a wide range of modular, decentralized applications for investments, remittances, payments, and more. By leveraging blockchain technology, OpenFi ensures secure, tamper-proof transactions and real-time settlement, reducing costs and enhancing trust. One of the focuses of OpenFi is also to abstract the complexity of Web3 away while still providing consumers with its benefit. It is still early days but neobanks are increasingly exploring Web3, not only by offering crypto-related products but also by using blockchain for payment and settlement rails. They are launching stablecoins and ramping up efforts to tap into OpenFi, thereby expanding their capabilities and providing consumers with more robust and flexible financial solutions.
The original fintech vision to create a more inclusive, transparent, and efficient financial ecosystem by enabling secure sharing and access to financial data and infrastructure is not possible on the existing infrastructure stack. It’s only truly achievable by leveraging blockchain technology. It was never about Open Banking or Embedded Finance; it’s about OpenFi, which leverages an entirely new infrastructure stack to turn the original fintech vision into a reality.