Article Author: Ben Basche
Article Translation: Block unicorn
While decentralized finance (DeFi), non-fungible tokens (NFTs), and the metaverse constitute the foundation of an exciting new type of native cryptographic internet, crypto/Web3 as a concept (let alone a new technological paradigm) will not persist unless it meets the needs of ordinary people and breaks free from its own insular niche. Fortunately, for those who have been showing people the crypto financial utopia on Thanksgiving for years, known merely as “the future of finance,” it seems that crypto is finally seeing a vibrant development of consumer-oriented, everyday financial applications built on blockchain technology. This emerging wave of non-custodial finance (NoFi) applications is pointing to a readily apparent opportunity for crypto to find widespread adoption in mainstream markets. Without the innovations in settlement, scalability, smart contract, wallet infrastructure, and DeFi protocols, NoFi applications cannot be built upon the foundation laid by the previous waves of speculative crypto adoption. Despite the fact that there are currently 50 to 100 million people transacting on the blockchain every month, the service market for general finance encompasses billions of people, meaning there is still a massive potential market waiting to be tapped by non-custodial finance (NoFi).
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Synchronous Development
In the early adoption of new technological paradigms, we often see synchronous development around similar ideas and problem areas, sometimes with slightly different solutions and assumptions. I previously emphasized this in a blog post about the wallet experience stack, which represents the convergence in Web3 of the identity-enabled and business-to-business middleware ecosystem enabled by wallets, with various players addressing this issue in diverse ways. In the consumer finance space of Web3, we also see a similar situation, with wallets, payment apps, neobanks, and centralized exchanges all converging in their development around some common, clearly evident use cases enabled by blockchain tracks with real functionality. Let’s take a look at some examples.
Non-Custodial Payment Apps
One irony of cryptocurrencies is that payments—a perhaps most obvious and typical use case for cryptocurrencies since their inception—have been the last use case to truly be developed and gain traction. Paying with volatile assets like Bitcoin and Ethereum has obviously been a niche activity and has supported the likes of DeFi and NFTs, but it was only after the appearance of stablecoins and cheap block space that blockchain payments truly began to have their day.
The most basic function of a crypto wallet—sending tokens—has finally become user-friendly enough to offer a Web2-level experience. We now see many applications and infrastructures focused on achieving this goal, including trendy consumer “crypto Venmo” and global payment apps like Eco’s Sling and Beam. There is even a community crowdfunding meme token $SEND and building a peer-to-peer payment app supported by an account abstraction (AA).
Unlike encrypted wallets, these applications resemble simplified versions of early Cash applications in appearance and functionality, often focusing on providing peer-to-peer payments for students and young people, or specifically remittance services for foreigners and remitters.
Non-custodial/Semi-custodial New Banks
Although some emerging non-custodial fintech companies are targeting narrow payment use cases (which is itself a huge use case), others are more comprehensive in dealing with their products, combining payments with additional stablecoin yields, encrypted multi-currency accounts, investment functions, and integrating traditional bank and card systems with encrypted fiat-crypto hybrid accounts. Projects like Decaf and LianGuaiie (both Solana applications) and the upcoming IBAN smart contract wallet from Obvious come to mind. Even the Malaysian exile government is creating a non-custodial new bank called Spring Development Bank for its citizens on Polygon. It needs to be clear that these are centralized entities, although they represent users interacting with traditional KYC financial systems in terms of centralized capabilities, their basic functionality and value proposition lies in users interacting with their non-custodial wallets (or semi-custodial/MPC) on the chain. Many functionalities that used to require banks (or challenger banks) are starting to move to the chain, and these non-custodial new banks provide users with a simplified interface to leverage all the functionalities of on-chain lending, borrowing, earning, and trading protocols in an excellent user experience. In some cases, non-custodial new bank functionalities will be paired with traditional banking functionalities, but as users’ financial “tasks” are increasingly being transferred to the chain, the traditional financial system (just like centralized exchanges are now starting to impact crypto users) is becoming more and more like a silly switch.
New Banks 2.5
Although most non-custodial payment apps and new banks to date are emerging native crypto startups, we also see significant activity in the existing new bank/challenger bank space, including existing new banks setting up non-custodial/semi-custodial wallets for their users and providing crypto services, as well as custodial crypto-focused new banks and investment models offering similar services in custodial form. While not completely fully Web3 non-custodial new banks, they directly or indirectly utilize blockchain technology to provide their services, and we can refer to this category as “New Banks 2.5”. Cenoa, based in Turkey, focuses on regions such as Turkey and Argentina, providing custodial solutions for users to access stablecoins and on-chain earning protocols as a hedge against inflation in countries most affected by local currency volatility. Recently (perhaps even more importantly) is LianGuaiyLianGuail, which has expanded its crypto efforts from custodial crypto trading to EVM-based stablecoins and embedded wallets, similar to Africa’s Yellow Card. In addition to typical fintech itself becoming crypto new banks, Brazil’s NuBank, Germany’s N26, the UK’s Monzo and Revolut, and the US’s Cogni are also following a similar path. New banks operate in a competitive environment and are considered challengers to traditional consumer banks, but in the crypto field, they find themselves transitioning from challengers to the challenged. They are becoming hybrid traditional financial and crypto new banks by increasing their investment in crypto services. It is not surprising to see these larger traditional consumer banks also starting to think in a similar way.
Centralized Exchange
A centralized exchange is one of the oldest “applications” in the crypto space. Although they represent “centralization” in the crypto environment, they are doubling down on developing their non-custodial wallets and quasi-super apps, and providing services for an increasing number of these “fintech” crypto use cases through their centralized infrastructure. Binance Pay (usually priced in USDT or Tron USDT) has significant influence and daily usage in cross-border remittance channels and emerging markets, particularly in Latin America. Coinbase’s USDC yields offered in its main app, as well as the aggregation of entitlements in its Coinbase Wallet app, plus the semi-payment functionality launched in its Base (e.g., Beam Eco), all provide financial services to their existing users. Centralized exchanges have a good position to provide financial services to existing users and have invested in growth areas like independent wallets to capture more emerging use cases.
While the exact scope and approach may vary, what are all these participants converging around? What is it? Could it be actual consumer fintech use cases, early product-market fit?
Users and Use Cases
There have been numerous articles on early adopters of crypto local economies, but for cryptocurrencies, the most important user group appears to be the “early majority” (in Geoffrey Moore’s words), a group that can actually solve everyday financial product problems in a meaningful way. To transition from early adopters to the early majority, a technological paradigm needs to “cross the chasm” from early adopters trying to see the value in new things to the early majority who are just trying to get something done in their lives.
Moore also describes the typical process that occurs, where initially, a set of vertical use cases emerge, like a set of “bowling pins” that get knocked over one by one, as adjacent use cases provide ample opportunity for crosswise and generalization. This all culminates in a “tornado” where early use cases converge under the massive adoption push of the early majority, creating a massive integrated winning platform and a suite of applications that find product-market fit. In our non-custodial financial world, we are seeing the emergence of these “bowling pins” that give us a sense of what the tornado might look like.
Payments
As mentioned earlier, while it seemed obvious in the design of crypto to send value from A to B, over the years, the significance of crypto payments has been nothing more than an implementation detail for some novelty or very localized crypto app (or criminal activity). Classic reference use cases within crypto had little real motivation, which became an inside joke within the crypto circle. But this is changing rapidly, and what’s interesting is that TRON and Binance have gained real traction in the area of daily payments in emerging markets, and now more and more crypto application layers are attempting to reposition themselves around consumer payments that just work using blockchain infrastructure. Of course, a key catalyst here is the emergence of stablecoins like USDT, BUSD, and USDT, which play a significant role in other parts of the non-custodial fintech space. Broadly speaking, payment motivations seen in crypto can be divided into two near-term areas and one medium-term area – peer-to-peer Venmo-like payments, remittance payments, and B2C payments. Creating a Web3 version of Venmo may be the most obvious decentralized crypto application, but in reality, the full functionality and benefits of crypto can only be consumable with the arrival of stablecoins, cheap networks and layer 2 networks, seedless custody and account abstraction. These same benefits also apply to international remittance payments, as significant crypto remittance flows start to emerge between Latin America <> the United States and Africa <> Europe.
Inflation Resistance
Especially in emerging markets, inflation resistance is closely related to payments and remittances. The main factor here once again is stablecoins – especially USD stablecoins – as people in countries with weak or volatile currencies are seeking ways to protect their wealth. Latin America is again at the forefront of this trend, which is to be expected considering its unstable currency background, but we can see this trend in people’s desire to preserve value in the gold standard – the US dollar (no offense to the financial enthusiasts). Non-custodial financial applications can provide basic access to USD for anyone in the world (usually easier/cheaper than traditional forex channels), as long as they convert from fiat currency in some way. These USD can be held, put into interest-bearing accounts, and sent to anyone around the world with a compatible wallet at an increasingly lower cost.
Savings/Earnings
Everyone with excess cash needs somewhere to store and preserve that value, and we see non-custodial financial applications leveraging on-chain infrastructure to provide users with easy-to-use, consumer-friendly interfaces for earning interest and returns. Although on-chain interest rates were once low, more proactive interest rate policies from centralized stablecoin issuers to match the off-chain fixed income environment have brought on-chain rates closer to rates in the off-chain money market. Even without the significant fundamental rate advantage that DeFi had in its heyday, various different permissionless yield products still allow people to effectively increase their savings. DEX LP positions for stable or blue-chip currency pairs, conservative money market positions, stablecoin risk-free rates, and conservative yield aggregation strategies all provide potential on-chain sources of income for non-custodial financial applications, representing their users, whether it’s for their stable assets (thus expanding inflation hedge use cases in these instances) or for any volatile/investment assets. We see the outline of this experience in user-centric Web3 native applications such as Instadapp and Zerion, where they make it just a couple of clicks to deposit funds into yield positions, and consumer applications like Cenoa mentioned earlier that simplify it all into a “savings” feature.
Borrowing
On-chain borrowing is more challenging for consumers compared to lending, as most credit in the world is low-collateral/unsecured, but we still see interesting progress and innovation. Non-custodial financial applications have not fully embraced this yet (except for Binance truly offering encrypted loans to users), but we can expect that to change soon as progress is made on the underlying protocols and can be delivered to the interface. MakerDAO’s SLianGuairk protocol allows you to borrow DAI at a fixed interest rate of 3.19% (and spend with an optional linked debit card), which is very attractive in today’s environment as long as you provide double the loan collateral. It will be interesting to see if it attracts any retail borrowers who are priced out of personal loans under the current interest rate and credit scoring system and want to lock in low-rate loans for purchases without actually spending funds. Alchemix offers “self-repaying loans” – which could be applicable for purchasing a car or making a down payment on a house. DeFi protocols like Goldfinch are delving into uncollateralized lending, serving off-chain businesses, and this idea could expand to millions of small enterprises, with the experience gained from it definitely providing insights for the next wave of attempts to build more accessible credit applications, whether it’s based on oracle-based unsecured models, post-Sybil reputation models, or innovative new collateralized lending protocols with more attractive features. The “final boss” is the opaque, centralized, Orwellian credit institutions and traditional banking credit ecosystem, and once DeFi presents better solutions, non-custodial finance will be able to present them to consumers.
Forex/Multi-Currency Accounts
For certain user groups, such as international students, foreigners, freelancers, and digital nomads, dealing with multiple currencies is part of life. While receiving payment in one currency, there may be a need to remit the home currency back to the country or pay for a SaaS application in another currency. If you have multiple clients or part-time jobs that pay you in different currencies, there is a need to quickly exchange funds between different currencies. The traditional banking system may be cumbersome, slow, and expensive for such exchanges, and administrative expenses may actually be unaffordable for some people. Through stablecoins and decentralized exchanges (DEX) provided by non-custodial financial applications, people can have a “cryptocurrency multi-currency account” that includes multiple stablecoins, which they can send, exchange, or save according to their needs. In the same user groups, multi-currency accounts have become popular features of non-cryptocurrency financial technology/emerging banking applications, and with more and more emerging banks in the cryptocurrency field focusing on these use cases, and existing fintech companies starting to explore blockchain as an alternative solution, these two sets of use cases are expected to merge over time.
Trading/Investment
Trading is the first core use case of cryptocurrencies, so we won’t spend too much time discussing it here, but it is worth noting that the opportunity to invest or even trade risky assets has been driving the traditional fintech field in terms of stocks for some time (consider Robinhood). This is a reasonable user demand that non-custodial financial technology applications can obviously provide to their users. Decentralized exchanges (DEX), bridges, and aggregators make it relatively easy for consumer applications to provide non-custodial cryptocurrency trading to their users, enabling them to take on a certain level of risk exposure. With the tokenization of more real-world assets (RWA) on the blockchain, the prospect of offering everything from cryptocurrencies, stocks, forex, real estate to fixed income transactions from a single application becomes apparent for non-custodial financial technology applications. If a DeFi yield protocol for digital dollars can hedge current inflation and achieve monthly savings goals, why not use the same application to simply invest the remaining funds in the latest hot cryptocurrencies or stocks?
Implementation Models
Of course, synchronous evolution occurs around the problem space, accompanied by synchronous evolution around the solution space. As we finally begin to see NoFi applications that can reasonably compete on a large-scale market, we can see some common threads supporting different approaches. Let’s start from the high-level settlement layer, all the way to the application layer, and then delve into some key technological topics.
Multi-party Computation (MPC), Account Abstraction, and the Elimination of Seed Phrases
It is obvious that the next billion users will not securely store a 24-word phrase, and in the past 12 months, the encryption industry has taken this meme seriously and launched many different implementations, standards, and software development tools to help dApp developers provide a web2-style login experience with encrypted wallets. I detailed this field in the article “Wallet-Centric Experience Stack,” but it is worth reiterating that secure self-hosted solutions are crucial for the development of NoFi application layers, as they can provide web2-style login and recovery functionality. Whether the specific implementation is based on MPC, smart accounts, or a combination of both, NoFi applications are leveraging the latest and best wallet experience stack middleware innovations and bringing them to the masses. Beam’s Eco utilizes ERC-4337-compatible smart accounts and account abstraction infrastructure on Optimism (and soon Base) to provide an entry process without seed phrases and a payment experience below 5 cents, accessible even to users who have never set up a wallet before through a link.
Solana
As a well-known Ethereum enthusiast, I must admit that I have to give Solana the credit it deserves. Sling, Decaf, and Key.app all run on Solana, and they may be the three smoothest NoFi applications currently in existence. While Solana has consistently performed well in terms of cost (despite the decentralized trade-offs), its notable presence in the NoFi field lies in the quality of application builders and its positioning for daily user value. Therefore, although Ethereum’s sidechain ecosystem is quickly catching up to Solana in terms of cost and speed, from the perspective of innovating NoFi user experiences, Solana’s application ecosystem may be one step ahead in certain aspects.
Zaps, Metatransactions, and Intent
Without going into a lot of details about blockchain intent and the future of MEV, I just want to mention that bundling multiple on-chain operations together for users to transact easily is not just about allowing speculators to get the best limit order prices. Whether it’s on-chain “zaps” or “schemes” of multiple transactions to be executed together or off-chain signed messages representing user intent, NoFi applications can leverage a combination of various types of transactions and similar transaction instructions to simply provide users with the content they are looking for. In NoFi applications, we will soon see these small frictions eliminated, such as buttons like “Convert to USDC and save” or “Convert to ETH and stake”.
Block unicorn note: Zaps refer to aggregating a series of interactive processes into one-step/one-click operations, also known as Zaps.
Integration of Cryptocurrency with Traditional Financial Banking and Payment Systems
In this wave of NoFi (Non-Custodial Finance), we see another implementation theme of integrating cryptocurrencies with traditional finance in meaningful ways. One of them is that the entities operating these applications are often able to add value to users by establishing relationships with banks or collaborating with some banking infrastructure providers. Non-custodial neobanks are essentially just 95% non-custodial wallets that can add fiat-to-crypto services and bank accounts to deepen the value offered by these applications. Being able to automatically deposit part of the salary into a non-custodial wallet makes other services in the wallet more valuable and necessary, and being able to use cryptocurrencies for card payments or tap-to-pay at grocery stores further expands the value. Users need to undergo real-name verification when using these services, which means they give up some anonymity, but for most users, real life is already “real-name verified,” so this just makes cryptocurrencies better integrated into their lives. As Visa and Mastercard have already experimented with payments on EVM-based smart accounts and account abstraction, and the hybrid world that connects on-chain and off-chain in the user interface is becoming more and more common.
Tokenization of Real Assets
As mentioned earlier, an increasing number of high-quality real assets are being tokenized, enabling new consumer financial products that would otherwise be impossible. The most obvious and direct way is through stablecoins themselves. Issuers like Circle and Tether are issuing tokens by investing billions of dollars in short-term notes and increasingly passing on returns from government bonds and other short-term off-chain securities to on-chain stablecoin holders. Another example is the recent wave of on-chain US Treasury bonds that cryptocurrency investors can access through platforms like Ondo Finance. While you need to undergo real-name verification (and there may be geographical restrictions depending on the product you want to use), once the verification is completed, you can access lucrative returns in a user-friendly on-chain wallet without having to navigate through confusing broker applications. As more valuable real assets are tokenized and introduced onto the chain, they create more potential financial products for regular users.
Why now?
To understand why we are seeing explosive growth in these use cases now (regardless of whether you like it or not, TRX chain has 2 million DAUs), and why even serious players like LianGuaiyLianGuail are joining in, we need to look at some factors that are collectively driving progress.
Stablecoins
The first and most obvious reason for the rapid rise of NoFi is the maturity of the stablecoin ecosystem. Digital dollars (and an increasing number of other fiat currencies) can be said to be the killer application of blockchain so far. As we have discussed in most examples, stablecoins are the lifeline of actual day-to-day business that volatile cryptocurrencies cannot achieve. Digitized frictionless fiat currencies are permeating various applications, regions, and sectors. This momentum is accelerating rather than slowing down, with Circle alone generating over $700 million in revenue in the first half of 2023 with its $26 billion USDC issuance, surpassing their total revenue for 2022.
Tether is making a lot of profit, and if the situation continues, they may become significant holders of US government debt. However, more important than the large issuance or revenue statistics is the adoption by ordinary users and businesses to do the ordinary and necessary things mentioned above, especially those who previously had little or no banking services in developing countries. In developed markets, we have not yet seen their explosive use in the mainstream, but there is reason to believe that this situation may change (more on that later).
Maturity of Scalability Solutions
In the blockchain scalability war, I don’t want to prematurely declare victory over the trilemma in practical applications. Although a lot of architecture, engineering, and decentralization still need to be established in the blockchain scalability ecosystem, we are getting closer to the point where decentralized blockchains become too expensive and cumbersome to achieve everyday use. The transaction costs of Solana have been reduced to the point where they can be almost ignored, and the Ethereum ecosystem’s “Manhattan Project” focus on Rollup-centered roadmaps is finally showing real results. We will not only see a significant reduction in Rollup costs from EIP 4844, but also see all the scalability advantages that the zk field has yet to fully exploit. In addition, we see the creation of a thriving L2 infrastructure ecosystem to the point where applications will be able to easily launch dedicated “Rollapps” for their applications to achieve maximum control, performance, and profit. Cryptocurrencies as a whole, especially Ethereum, have gone through a “difficult period” in terms of scalability, but these efforts are producing excellent “good enough” L2 solutions that can be applied to almost any use case with just a hard fork. Therefore, NoFi applications are entering the most relaxed blockchain space environment in the history of cryptocurrencies, with multiple good and continuously improving network options to choose from.
Innovation in Wallet Technology
As mentioned above, products like MPC, account abstracted smart accounts with gasless transactions, and products like Privy and Web3Auth are closely tied together to provide a more convenient way for developers who want to build applications on top of encrypted features with deep native wallet functionality. The next wave of encrypted neobanks and non-custodial fintech applications will no longer have to worry about users’ seed phrases or the need for installed wallets. Not only have these blockchains finally become cheap enough, but applications can also add frictionless interaction with state-of-the-art smart accounts with just a few lines of JavaScript code.
Macro Tailwinds
Stepping back from cryptocurrencies themselves and looking at the backdrop in which they operate, we can see that the world around cryptocurrencies is moving in a direction that makes this NoFi innovation more attractive and necessary. Inflation volatility has made a strong comeback, especially in developing countries with weak currencies, and the desire to avoid exposure to international and local inflation fluctuations is growing. E-commerce is attempting to penetrate every corner of the earth, but in areas with weak local banking and payment infrastructure, or in places without access to the internet, the enthusiasm for traditional fintech innovation has been suppressed. The long and boring path of market efficiency is being driven by cutting down on centralized (i.e., expensive) intermediaries.
Blockchain as a Vehicle for Competition
All of the above factors, along with many more, come together to give blockchain various “vehicles” for competition in fintech applications. Cryptocurrencies are beginning to incorporate a calm and practical reality into their value proposition in this emerging NoFi field, rather than relying on speculative future value or ideology.
Transaction Costs
Centralized intermediaries have a certain profit requirement, and the more stacked centralized intermediaries used to transfer value from one place to another, the more profit they will extract from consumers and businesses. Blockchain can merge intermediaries into smart contracts, fundamentally doing more with less resources. One area where the success of cryptocurrencies is clearly evident is in reducing the transaction costs of international payments. Sending a payment between two countries using the international wire transfer system costs nearly $100, while sending it through USDC costs less than $1. As fuel costs and scalability become less of a problem, the obvious advantage of cryptocurrency payment systems in transaction costs will permeate every possible service provided to consumers and businesses. By using blockchain to achieve this, every profit that can be recouped through this method will be reclaimed. Autonomous DeFi protocols may design more “profit space” from finance, and NoFi applications can use better financial products to feed these profits back to consumers.
Composability
Composability is greater than simple interoperability. It refers to how different parts of an ecosystem connect with each other to create higher-order and more complex value. From the most basic perspective, NoFi products based on EVM wallets immediately gain the ability to pay with any other on-chain EVM wallet, interact with DeFi protocols, read identity NFTs from other applications, and create EVM application logic using wallets. While this is a somewhat abstract attribute, it is closely related to general interoperability and network effects. However, the unique composability of cryptocurrencies allows for the combination of various services to achieve greater end customer value. When combined with the next attribute, permissionlessness, NoFi builders immediately gain a huge sandbox when enabling their users to connect to the blockchain, enabling them to easily enable transactions, borrowing, lending, payments, or anything that combines or is built on top of them.
Permissionlessness
When building fintech applications, integrating with other complementary providers or value-added services can be a cumbersome, expensive, and time-consuming process. Integrating with crypto protocols is completely different because, although there may still be some user experience issues when using some of these protocols, the fact remains that anyone in the world can add a basic “savings” function to their application when their application is a wallet and they insert it into Compound or Aave. This permissionless integration leads to faster innovation cycles and a wider range of potential building blocks for building impressive financial products and experiences.
Reduced Business Footprint and Liability Surface
One of the more interesting aspects of non-custodial finance that makes it an attractive approach for fintech players is the different division of responsibilities created by its non-custodial nature, involving users, developers, and other services. Along with the aforementioned permissionlessness, non-custodiality not only reduces the initial friction when integrating content like DEX trades into your application, but also (in many jurisdictions) enables you to do so from a legal and regulatory perspective relative to integrating traditional stock trades. The same applies to activities like lending, which are typically reserved for traditional banks but can be accessed by anyone with a wallet through DeFi protocols. NoFi applications can provide a suite of financial services, BD licenses, MTL licenses, and even banking licenses if you can consider moving on-chain (and your exact jurisdiction) as well as regulated third-party providers such as regulated switches. There are even experiments with more decentralized wealth management on-chain in a practical advisory capacity (though, again, not legal advice). This completely disrupts the way financial technology applications are developed, as it means that there can be a much wider range of potential participants in the financial services space. By minimizing the off-chain footprint of the business and earning money through transaction interface fees, NoFi applications can actually enter markets that they couldn’t access in a non-crypto way.
User Experience (UX)
Is user experience (UX) a potential selling point for crypto financial services? Isn’t it precisely because of the user experience that we are unable to achieve mass adoption? While work is still needed to improve the crypto user experience, over time we can actually expect significant benefits in terms of user experience from crypto technology compared to non-crypto technology. Take logging in and making payments, for example. To fully achieve this, a certain number of crypto technology supported applications and wallet-holding users are needed, but people can simply connect to their wallets and make payments without entering any additional information because they control their own private keys, which will over time result in a better experience than web2. Instant crypto payments, compared to the annoying wire transfer screens when sending international payments from a bank, could inherently require fewer clicks than even the fastest corresponding web2. Currently, user experience is equally split between support for and opposition to crypto technology, but that will change soon (for some of the aforementioned reasons), providing an opportunity for a fundamentally inverted sovereign user experience that the wallet implies simplicity of. This will attract users in terms of sheer usability.
What’s next?
Non-custodial finance (NoFi) is now entering its prime environment, and I believe the number of participants vying for this opportunity will grow by an order of magnitude in the next few years. This space will not only become highly competitive, but also blend with the competitive dynamics of fintech and the existing new banking industry, forming a dynamic whole. It is difficult to accurately predict who will emerge as the winner, but there are some future directions worth paying attention to.
Social and Social Finance
Parallel to almost all of these non-custodial finance (NoFi) content is a thriving decentralized social networking ecosystem, with a large part centered around cryptocurrencies. Protocols such as Lens, Farcaster, and BlueSky are opening up new design space for social applications, and as this explosion in social network design continues, there is likely to be a fusion of business model innovation from creators and others with the emerging field of NoFi. In the past week, we have seen a very interesting experiment with social tokens on Friend.tech deep within the crypto Twitter, although still in its very early and niche stages, as more and more innovation happens in the decentralized social (De-So) realm, there will be mutual influence between the two. Perhaps the most impactful example is what would happen if Twitter/X were to enter cryptocurrency payments. Additionally, there are ongoing experiments on-chain regarding community finance, microloans, social insurance, and basic income programs, which have finally become relatively simple technologically, and we should expect the development of the multi-person financial field oriented towards solving people’s practical real-world problems.
B2C Messaging and Conversational Blockchain Commerce
Message transfer protocols like XMTP are finally starting to be adopted in consumer wallets, not only in consumer wallets like Coinbase Wallet but also in b2b experience stack providers like Dynamic.xyz. This is beginning to imply a set of very powerful business use cases that may involve conversations between consumers and dapps or even merchants. Conversational support, sales, and marketing will enter wallet-based commerce and bring additional considerations to NoFi applications. Will they become b2c platforms themselves (like Decaf is doing, through its consumer wallet and merchant encrypted PoS solution), or will they attempt to become a universal client for blockchain commerce, representing users’ permissioned application support for transactional messaging? This will open up a whole new trusted business communication field, as artificial intelligence clogs all of our digital communication channels and spammers become more effective and scary.
Experience Stack Providers will Focus More on NoFi as an Application Scenario
I expect wallet experience stack providers mentioned in this article and my other articles to increasingly focus on NoFi as a vertical field. In addition to gaming, NFTs, and traditional DeFi, these consumer-facing financial applications are a perfect embodiment of the value proposition of middleware products, providing a web2-like experience on the web3 track. There are over 40 well-funded companies and projects in this field, and their attention will bring better NoFi development solutions and the emergence of more killer applications.
The Power Finally Emerges in Developed Markets
Early NoFi developments have mostly focused on emerging markets or people associated with these emerging markets. This intuitively makes sense, as these regions typically have underserved markets while wealthier countries tend to over-serve consumers. However, as the aforementioned forces come into play in the system, we will see more and more innovation happening in markets where consumers are over-served in certain obvious dimensions but under-served in certain less obvious dimensions. This is likely to manifest as innovation gradually trickling back from developing countries to more developed ones.
Decentralized Super Apps
Finally, while this article assumes many different approaches to NoFi applications, it is entirely possible for a few dominant players to aggregate these “imperfect financial functions” and create a “decentralized super app” similar to WeChat or GoTo. These apps can not only perform all the tasks mentioned above, but also connect the entire decentralized internet through some kind of dApp browser (or more likely, a mini-app framework in the style of “mini-programs”). Some universal web3 wallets certainly hope for this scenario and many people are crowdfunding with this as an investment theme. Although I believe that one of the current batch of integrated web3 wallets may reach the scale and scope of a super app, I think it is more likely to be existing tech giants and smartphone manufacturers, or NoFi applications that approach from a more focused perspective on the mass market and a more limited initial scope.
Conclusion
While I am excited about use cases that are directly from on-chain culture and completely cutting-edge, a fully decentralized internet and metaverse will take time, and NoFi currently exists as a bridge to reach the majority of early users in the crypto space.
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