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November 25, 2020

In Conversation With

How people are underestimating smart contract risk with ParaFi Capital


The value of assets locked in the DeFi markets is crossing the $8 billion mark. Parafi was founded in 2018 when DeFi was at its most nascent. Nisa asked ParaFi Capital Partner Santiago R. Santos, who comes from traditional finance, how he got involved and if he ever expected all this growth to happen?

(12:20) “We’ve been investing in crypto since 2013. And if you look over the course of that period, where I think the product market fit of crypto has largely been is around transfer of the value, store of value, medium of exchange. And so for us, naturally, we look at DeFi as a continuation of that. And so certainly DeFi has picked up over the last year, year and a half in earnest, largely built on Ethereum. But i think there’s been a lot of groundwork built over the last 10 years of infrastructure. And I think we’re hitting an inflection point that is getting very, very interesting where a lot of projects have been building and it’s gotten to a point where things are ready for prime time.”

Vitalik Buterin said a lot of people are underestimating smart contract risk, and Nisa asked Santiago if the Ethereum co-founder is right.

(14:30) “DeFi is a year old, or a year and a half old. Some of these protocols haven’t been truly battle tested….I think value in these systems keeps growing and I think that is a good sign. Just yesterday there was another hack of Open, which is an options protocol. You know things are moving fast, some will break invariably. One of the companies that we’re investors in is Nexus Mutual, which allows you to actually buy cover on smart contracts. And so I think risk management in this space, there’s a huge opportunity for people to come in here to develop more robust options platforms, credit default swaps, and to just continue to expand Nexus, to continue to grow. I think it’s just getting started. But certainly I mean, to Vitalik’s point, I wouldn’t necessarily disagree. I think these protocols are still rather young.”

Santiago discussed how to explain DeFi to potential LPs.

(18:59) “We’ve been having conversations with some of the largest asset managers and pension funds, university endowments and the like that are crypto curious and that have been for the last couple of years. And when they ask us about DeFi, really our response back to them is think of this as the arch of innovation of fintech. Forget for a second about crypto, forget for a second about blockchain. Know that fintech is moving in this direction. Why? Because it’s a secular trend…I think we’re not far from a state of the world where people are interacting with defi apps without knowing it. And I think that’s the beauty of powerful technology. Noone cares about crypto. Noone cares about blockchain technology. At least that’s our pragmatic approach to investing in this space.”

Santos believes that crypto is generally a retail phenomenon.

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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