ShopFi = DeFi + Shopify?

Don't have time to read all of this? Check out my TL;DR here.

Inspired by Tobi's tweet:

I thought this would be a great chance to deep dive Shopify's product and share my own strong, but loosely held opinions about their opportunities in a fast growing space i'm passionate about.

I don't represent Shopify in any way, and all of my opinions are my own.

I am a product manager and a technology enthusiast. While I have conducted my own research, I am not an economics, ecommerce, or financial subject matter expert. If you notice any factually incorrect details, please let me know so I can correct my understanding.

Lastly, I am not a financial advisor, and none of my content should be considered advice.

Shopify, making commerce better for all.

Click here to review my full product breakdown.

Commerce is the conduct of trade among economic agents. Generally, commerce refers to the exchange of goods, services, or something of value, between businesses or entities.

As a leading global commerce company, Shopify provides a single platform for merchants of any size to start, grow and manage a retail business online.

The initial solution was a cloud platform that allowed merchants to create a storefront for their retail business. Over time, as businesses grew, and Shopify expanded to include other partners into the ecosystem, more solutions were developed to offer support at all stages. Shopify has even started to push into Payments, a consumer facing app, financial services, and a globally connected fulfilment network – all centered around merchant growth.

In a sense, they are working to decentralize commercial opportunities, by supporting merchants from a platform based approach, instead of an aggregator like Amazon.

For more details on Shopify's platform based approach, read my article here.

Through this symbiotic relationship, Shopify was able to align their own interests with the interests of their stakeholders.

Their mission is to make commerce better for everyone.

  • 'Better' and 'Everyone' are kind of vague. Let's remove some ambiguity.

What is better? They mention that "the future of commerce has more voices", so I am going to assume better means overall commercial growth. We'll quantify this later.

Who is everyone? Let's review the direct and indirect stakeholders impacted by this mission.

Key Stakeholders

We can uncover the stakeholders present in the Shopify ecosystem by mapping out the value stream of a business operating an eCommerce storefront:

I break this down in my product review, found here.

Shopify's core stakeholders are merchants. They are the engine in which all parties connect and prosper from. Without them, there would be no goods or services for sale, or money coming in to pay for all of the supporting services and participants in the value stream.

We also need to address the duality of commerce. Supply and demand. Without someone to buy goods and services, the engine can't even get started. This is where buyers come in. They are the fuel for the engine.

While it is important to consider the needs of all stakeholders in this ecosystem, we will mostly be focusing on the impact of DeFi for Merchants and Buyers.

Commercial Growth

Since our goal here is to facilitate commercial growth, we need to be able to measure the forces that help a merchant grow their business, and how buyers fuel it.

Let's create a mental model of how we can look at growth as a system:

If we consider the loop model, the more we can compound our returns, the faster Shopify's commercial ecosystem can grow. But how can we measure our inputs, outputs, and efficiency losses?

A supporting model for our DeFi applications.

Loop Efficiency = Output/Input = NVM / GMV


The input metric represents how much commercial activity occurs on a macro level, using Gross Merchandise Value (GMV). This is a measure of the total value, in dollars, of transactions occurring within a given time period, which can be a great indicator of the work potential of our system.

GMV =  (# of customers) * ($ Average order value) * (# transactions)

If you are interested to understand this metric at a micro-level, it can be further broken down at in this article.

Note: Partners help drive these GMV variables at a micro level.


However, this metric alone does not account for the health of a given merchant – or the outputs of our commercial ecosystem. For that, we need to measure Net Merchandise Value (NMV), which factors in all costs, refunds and other expenses as our output variable.

NMV =  GMV - Costs

This is what is used to re-invest in a business, which powers the compounding growth loop for commerce. Exactly what we are aiming for.

We should also make note of working capital, which is just a measure of how a company's assets compare to their current liabilities. The more working capital available, and used to reinvest in growth, the more we can compound each loop.

Points of Friction

Now that we have an idea of the parties involved, how they participate, and where value is created – we can explore some existing points of friction, which become opportunities for improvement by introducing DeFi.

If the “goal” of commerce is to compound the impact working capital within the ecosystem, anything that detracts from our growth metrics can be considered ‘areas of friction’.

Let's walk through an example:

**Values are for demonstration only. They may not be accurate.

$100 from buyer (Input)

  • $50 dollars to produce goods
  • $10 to Shopify for subscription
  • $10 for shipping
  • $5 to bank for account and loans
  • $5 to stripe for payment gateway
  • $5 sales tax
  • $5 to employees, profit taking
  • $3 to payment processor
  • $2 for card payment network
$95 dollars spent, $5 dollars left (Output)

This would produce an efficiency of 0.05 for every $100 that enters the system. $5 is leftover after performing the work required to complete a commercial transaction.

Global Commerce

We should also be aware of market trends that impact our system. Global commerce is on the rise, and everyone doesn't purchase goods the same way.

As global commerce continues to grow, the existing pain points we uncovered are compounded. Other challenges such as cross-border purchases, foreign exchange, and even different payment preferences and add unnecessary complexity when transacting internationally.

For example, in China, credit card usage is less than 5%. Payment methods such as cash on delivery (COD) or alternative payment networks like Alipay or Unionpay are popular.

Up to billions of people don't even have a bank account. If we want to grow international GMV, it is important to include everyone in the economy and empower unbanked merchants to build wealth too.

Products like Venmo, Paypal, and Cashapp promote peer-to-peer payment systems through 'eWallets'. This has provided the unbanked, particularly in developing nations, a way to participate. It's a much cleaner value stream too.

Solution Space

At a glance, here are some ways we can improve Shopify's vision:

  • The number of parties required to process a transaction between a buyer and a merchant are excessive, slow, and costly. These reduce our NMV.
  • Buyers drive GMV. By supporting more types of products, we can reach new audiences or increase the spending of existing ones.
  • Commerce is constrained by a merchant's working capital. Currently, banks and other financial institutions are the primary sources of capital. This is used to invest in the business, and can improve the Loop Efficiency value. NMV yield > get loan > scale up operations > increase NMV > get more capital > etc...
  • The more we can get partners involved, the stronger our compounding loops (Loop Efficiency) become, as they are self re-enforcing. Hire partner to increase conversion > more NMV > more budget to hire partners > etc...
  • Physical products are much harder to scale, and involve a complex delivery process. These reduce NMV. By introducing more revenue streams, particularly in the digital space, merchants can potentially increase NMV.

So where does DeFi fit in?

DeFi: a new frontier

DeFi (Decentralized Finance)

DeFi is an umbrella term used to classify all financial related applications built on top of a blockchain and accessible to anyone in a decentralized manner; instead of through a centralized financial institution. Protocols like Ethereum have made it possible to create programmable financial transactions that can interface with software applications.

I recommend watching this primer if you are new to DeFi, as this article assumes at least a baseline understanding.

The core takeaways you should be aware of:

  1. DeFi is a fully decentralized alternative to traditional financial services.
  2. It provides open access to services that previously required a bank account, or significant capital.
  3. There is no single authority in control. Many dApps (decentralized applications) within DeFi are run by the community. There is no customer support from a central party.
  4. DeFi empowers individuals to build wealth through putting their digital assets to work.
  5. DeFi consists of financial service dApps that are created using smart contracts.

Now, let's get an idea of how this works:

Pictured below is Uniswap, a DeFi dApp that runs on the Ethereum blockchain. Users are able to swap any supported token for another, as you would at an exchange like Coinbase or Binance.

Uniswap, a killer dApp that helped take DeFi to the masses.

The main difference here, is that there is no company providing this service. It is entirely operated by blockchain transactions. Luckily for us, we get a nice interface to use. When a 'Swap' happens, the dApp automatically puts together a transaction request on the user's behalf, and broadcasts it to Ethereum. Once the transaction goes through, the user will receive the token they requested in exchange. Pretty neat, huh?

Ethereum uses smart contracts, that I mentioned earlier, to handle the business logic of this swap. Once deployed to a blockchain, smart contracts are publicly available, and anyone can interact with them. Check out the smart contract here. This provides users the ability to review, and ensure that applications perform intended functions. It's also what lets users know how to interact with the business logic within.

I'll spare you the technical details on the rest, but blockchains are the 'back-end' of the 'front-end' dApps that power DeFi.

Users do not have to deal with storage, networking, or chain interfaces. This is where commercial applications can really shine: making blockchain networks accessible for end users.

So with all of these things considered, what opportunities do I see most promising for Shopify?

1) A globally inclusive, scalable payment system

Don't get me wrong; it's pretty easy as a middle class North American to buy stuff online. Especially with products like Shop Pay that securely save my credit card information, and can let me make that impulse buy from one click.

However, we've already gone over the complexity, number of parties, and overall cost of using credit cards as a payment method. While it isn't too big of an issue as a buyer, many merchants face additional fees by accepting credit cards.Not to mention the unbanked that we outlined in our global commerce section.

This system is clunky at a global scale.

By tapping into blockchain networks, anyone with a phone and an internet connection can openly send money to anyone else on the same network across the globe.

To get a better idea of what happens behind the scenes:

Instead of using a bank, or other central parties involved in traditional payment processes - blockchain is able to perform the same core jobs of an online transaction:

  • transfer of ownership
  • security
  • transaction audit trails

Except, cryptocurrency payments have additional benefits:

  • faster settlement
  • cheaper transactions (network dependent)
  • open access to anyone with an internet connection
  • no chargebacks for merchants
  • no middlemen

We should also be aware of the types of cryptocurrencies that can be sent globally. While you can send any of these across a network, should you?

Protocol Coins

This classification is the most broad, and likely what you are most familiar with. BTC (Bitcoin), XLM (Stellar) , XRP (Ripple), ETH (Ethereum). These coins act as the base monetary unit on their respective protocols.

Some, like Stellar and Ripple, want to provide quick and cheap transactions across borders or private institutions. Due to speculation, these coins still experience rapid price swings, although there are no expectations of future returns from holding them.

Bitcoin started as a peer to peer payment system, but due to it's scarcity, has since started to morph into a digital store of value, comparable to gold. Other protocols, like Ethereum, aim to completely redefine what money is and can provide a hybrid of monetary, commodity, and capital use cases.

Frankly, I think using either of these cryptocurrencies as a form of payment is inappropriate.

Security Tokens

These represent traditional securities on a blockchain: equities, debt, or a hybrid. In order to be considered a security, it must pass the Howey test. Many projects that emerged in 2017 via ICO (initial coin offering) raised money by issuing security tokens. These are a form of investment contract where purchasers anticipate future profits, dividends, or market appreciation.

Utility Tokens

Tokens on a blockchain that act similarly to commodities. They are consumed in order to obtain some kind of service, or work from the system. An example of this would be Filecoin, which provides decentralized data storage at the expense of their FIL token.

Governance Tokens

Governance tokens represent quantified voting rights for a given DAO (decentralized autonomous organization). It's similar to a security token, as owning these provides holders influence over the direction of a project. Currently, the major distinction is the level of decentralization of a project. Uniswap, a decentralized exchange (DEX) has a UNI token on Ethereum, that provides users a voice in what gets developed, and how a network's token economics may change over time. It democratizes ownership. There is no primary owner of Uniswap, and thus can't represent a security.... right now.

Non-Fungible Tokens (NFT)

Represents a certificate of ownership of a unique digital asset. Unlike money that can be interchanged with no difference, two NFTs are never identical. This is what many collectibles, or digital art pieces are built on top of. These can be transferred on a blockchain as you would any other cryptocurrency. I cover NFTs in more detail here.


These tokens were created to provide a medium of exchange that mirrors real world currency. For example, a stablecoin like USDC, represents the digital equivalent of 1 US dollar. These tend to be much less volatile in nature than their speculative counterparts. There is currently $66 billion USD worth of stablecoins circulating.

Many parties consider stablecoins an experiment. Since the space is unregulated, these tokens aren't distributed through a central party, like a central bank or the federal reserve. Instead, their supply and price are controlled through two primary mechanisms:


These types of stablecoins have some form of collateral used to stablize price. As more tokens are minted, price is secured by increasing the amount of collateral respectively. They can either be real assets like fiat currency or commodities, or even in some cases crypto itself. Maker uses ETH to mint DAI, a stablecoin on Ethereum.


These are the newest form of stablecoin. Instead of having a form of collateral, these use supply as a stabilization mechanism. As demand for the stablecoin increases, new tokens are minted to support the volume. The peg is maintained by a counter-balancing token that fluxuates in price and volume to stabilize the stablecoin. Arbitration across these tokens helps ensure the peg is maintained.

Central Bank Digital Currencies (CBDC)

CBDCs are the ultimate stablecoin. Instead of a proxy peg to a currency's price, these tokens will be officially backed by central banking authorities around the world. Instead of minting more 'money', these tokens can be issued into the blockchain networks.

While there are no CBDCs out in the cryptoverse yet, many nations are currently experimenting, with expectation that some may appear as early as 2022. Click here to learn more about ongoing CBDC projects.

The most notable experiment is the eYuan (digital Yuan) issued by the PBOC in China. They are currently testing viability within their local economy, and this token can provide them a way to programmatically control payments; including blocking transactions. Technology can be a blessing, or a curse, depending on who uses it. We will see how it fares in practice.

Market Impact:

A survey was recently published by PYMNTS and BitPay addressing some of the sentiment around crypto payments. Key findings from 8,000 US consumers in Feb 2021 included:

  • ~16% of the population owned or has owned cryptocurrencies
  • ~59% of non-owners are interested to use it as a payment option
  • product interests and past purchases can be seen below
  • demand from consumers for merchants to accept crypto is quite high

Challenges and Risks:

Taxable Events

Depending on tax laws, any transfer of cryptocurrencies can constitute a taxable event. Speaking strictly for Canada, even buying something using Bitcoin, which is a transaction, is subject to capital gains tax. Unaware buyers may face legal action from the CRA come tax time, which no one wants to deal with.

If crypto payments are going to work, buyers need to be aware of this and account for their taxes accordingly, payment providers need to assist with tax calculations, or another solution needs to be applied that addresses taxation issues. Luckily, DeFi can help with this – more on that later.


When it comes to protocol coins, massive swings in price occur frequently. These swings make it difficult to use tokens as payment since the price of goods can change significantly even during a checkout flow.

The verdict is still out if stablecoins can keep their peg. These could be much better forms of payment, provided risk is reduced for those that hold these tokens. For example, USDT, has had endless speculation about the feasibility of the underlying assets holding the peg. A recent report found that a worrying amount of collateral is low-quality. If word were to get out that these tokens weren't backed by sufficient collateral, it would mean the end to their price stability as users make a bank run to secure their assets.

When it comes to algorithmic or crypto-backed stablecoins like DAI or UST, these systems were put to the test during the recent market crash. There was a drift of up to 11% during heavy selling pressure. As the market stabilized, these algorithmic tokens returned to their peg at $1.00. One point to consider for DAI, is that USDC is being used as an emergency peg during volatility. It currently accounts to around 40% of the collateralized assets.

So far, these tests seem to pass.

Thanks for the vote of confidence, Tobi!

Emergence of CBDCs

Stablecoins are potentially at risk of regulation, or competition in the form of CBDCs. As cryptocurrency adoption grows, so does the amount of circulating stablecoins. Will central banks see these 'copycat' currencies as threats to the real deal, and restrict usage?

It will be interesting to see what kind of landscape develops once CBDC's are publicly available. It's also not out of the question for existing stablecoins, like Circle's USDC, to be commandeered by banks; merging both worlds.

Jose De Ponte, Paypal - VP/GM Blockchain at Consensus 2021 mentioned that he thinks thinks stablecoins and CBDC's will coexist.

Adoption and ease of use

Based on the previously mentioned survey, some of the barriers to adoption include:

It is challenging enough to get older users accustomed to design patterns, and web2.0 technology. Web3.0 currently takes that to a whole new level. Even tech savvy millennials have trouble understanding how to use dApps, calculate IL, and bridge tokens across chains.

It's going to take a lot of educational content, along with improvements to UX before (if) we are able to reach critical mass for this technology. Companies like Coinbase have done a great job making it as easy as possible to break into the crypto game. Without any competition, they could start to push into applications like eCommerce and start to take Shopify's lunch if cryptocurrency solidifies a viable presence in commerce.


As blockchains are much more complex than a simple database, and have some redundancies with duplicated transactional ledgers, scaling is one of the biggest challenges in DeFi today. The core metric to look at here is transactions per second (TPS). As more users process transactions on blockchains, the chains will need to support a higher TPS. Otherwise, block space gets crowded and transaction fees go through the roof.

If we compare some of the most popular chains to current payment systems today, there still remains a lot of work to do if we expect Bitcoin or Ethereum to be used as much as Visa or Paypal.

Commercial applications:

1) Accepting crypto as a merchant

Currently, crypto payments on Shopify are enabled through third-party partners:

According to Coinbase Commerce, over 8000+ merchants are accepting cryptocurrency already.

According to BitPay, accepting crypto can help merchants attract new customers, and even increases spending by up to 100%, compared to credit card purchases. Both of these contribute to GMV. Our survey details align with this data.

The process is pretty straightforward. Merchants connect their storefront to these payment partners, and they help the merchant with the logistics of accepting up to 300 cryptocurrencies at the point of sale. They even offer the ability to swap these assets to a local currency.

How BitPay Works
I wonder what kind of interest this has generated from the merchant side? This could be a great indicator to map out the other side of the equation.

The system can also address some of the FX challenges of online purchases too. Nothing is worse than making an online purchase to find out that you just got hosed for 5% above the current exchange rate. By using cryptocurrencies, or even native currency stablecoins to purchase goods – buyers can completely avoid unnecessary FX fees imposed by the current payment network.

By increasing the amount of payment options, merchants can attract more buyers, thus increasing GMV on Shopify's platform. Survey research has hypothesized that in addition to more buyers, the average transaction value of a buyer increases, when cryptocurrencies are used as a form of payment.

2) Permissioned payment networks: Diem

We should also be aware of Shopify's participation in the Diem project. Shopify's VP of Merchant Services, Kaz Nejatian, was a previous Facebook payments team member. I can only assume that he is heavily involved here.

Perhaps a lot of Shopify's crypto strategy is tied into the release of Diem.

We can get into the Diem project in another article; but the project aims to create an open source, permissioned global payment platform with smart contract capabilities; powered by CBDCs and a universal multi-currency coin. The list of participating businesses is extensive. However, delays and some key participants pulling out has raised some questions in the media. We will have to see how this project materializes, especially since it will complete for developer attention – who are already quite happy to be building on public, grassroots infrastructure.

A network is only as powerful as the number of participants it supports.

I very much hope that if Shopify's crypto strategy lies within Diem, they still support all of the public projects being built in the ecosystem. I believe it is through the public networks that commerce will provide the most benefit for all, just as the internet has.

3) Crypto asset management

I think over time as we get used to the new dynamic of using cryptocurrencies, many will quickly realize that some crypto projects are better served as assets, than as currencies.

Especially with the rise of CBDC's and stablecoins, as mentioned earlier, it makes no sense to forfeit your other digital assets in exchange for goods. It would be like giving a merchant your SHOP stock to pay for some new shoes. The time value of that asset could result in a very expensive purchase if you aren't careful.

If this is the case, commerce platforms and payment providers will need to adapt to merging DeFi applications and value stores. Products like Paypal are already on the forefront of this by offering a cryptocurrency wallet.

By keeping assets inside their ecosystem, and easily convertible to more liquid forms of currency, it reduces internal friction while increasing external friction to leave their financial ecosystem, much like a bank.

They who holds the funds controls the funds.

4) Abstracting the 'crypto' out of the product

Other products, like Chai, in South Korea, with over 2 million users, 75k DAU, ~$2 million USD processed daily, provides a peer-to-peer  eWallet and fiat onramp that connects merchants and buyers through the application seamlessly; without users even knowing their transactions are routed through a blockchain. The user experience is much akin to PayPal, but stablecoins are transfered on the backend.

Merchants can easily run promotions for buyers through these networks as well, providing even more opportunities for B2C marketing.

I believe, it is in Shopify's best interest to consider supporting some kind of eWallet functionality – even if it doesn't involve crypto. This would allow them to keep capital in their own ecosystem, influence spending, and synergize with their other value added merchant services: like Shopify Balance, and Shopify Payments. If crypto takes off, functionality can easily be added-in, with much of the groundwork onboarding users to their financial services already taken care of.

2) Yield generation for all

"Compound interest is the eighth wonder of the world"
- Albert Einstein, maybe?

Retail participation in traditional finance is finally showing noticeable growth. Especially since COVID. Products like Robinhood and WealthSimple have shredded barriers for the general public to start investing.

The masses are finally realizing that simply holding your cash puts you in a worse situation over time due to inflation.

Even better, putting that money to work can lead to sizeable returns over time. However, being a small fish in a big pond of financial predators can be risky. Big players also get much better rates and opportunities, which further allows them to take on leverage and compound their growth.

This 'race' puts onus on the general public, buyers and merchants alike, to find ways to grow their assets or fall behind. It's difficult though, when you don't have capacity, connections, or knowledge – or even a bank account for that matter.

Here's where DeFi comes in.

Disclaimer: I do not condone the use of DeFi. It is extremely risky compared to traditional investing activites, and is largely driven by speculation. Use at your own risk.

Due to the distributed, open, and trustless nature of the technology, everyone with an internet connection can put their money to work. There is no gatekeeping (right now) for anyone to participate on either side of a loan, or generate other forms of passive income. In our current system, this would never fly due to existing companies, regulations, liquidity requirements and counter party risk.

Just as fractional shares enabled more participation, so does decentralizing financial services.

The liquidity of many > the liquidity of a single entity.

Currently, there are 3 popular yield bearing mechanisms in DeFi:

1) Staking

DeFi yield can be generated by a process known as staking. Staking is just another way to secure a blockchain in the way Bitcoin mining uses  Proof of Work. Instead of using a ton of computational power to validate transactions, Proof of Stake uses collateral to secure the network. Post a bad transaction? Your collateral gets burned. Just as miners earn block rewards, stakers get rewards in a similar fashion for processing transactions.

Usually it requires a large amount of capital to participate in staking. Smaller players can delegate their tokens to a staker (validator) in a secured smart contract, to receive a proportional reward for the entire pool of collateral that is staked.

Generally the technical complexity to stake through a centralized party is the most straightforward option of these 3 options we'll review. It sounds convoluted, but it is (fairly) straightforward for the layman. A lot of this co-ordination happens behind the scenes. However, the service provider will usually take a cut for commission, so there are additional incentives to be a staking provider.

Expected yield is currently anywhere between 5-20%, depending on tokenomics, block space demand, and active stakers.

2) Liquidity pools

WARNING: This is an even more complex topic. Dive in here. There's no free lunch, as they say. If it was easy, everyone would do it.

Yield can also be generated through providing liquidity (LP) in an AMM (auto market making) dApp, known as a DEX (decentralized exchange). These solutions allow people to exchange cryptocurrencies on a blockchain, without any central broker, or even knowing who you swap with. This can also be called peer-to-pool.

Since this is decentralized, there is no concept of an order book like on the stock market. In a centralized system, it's pretty straightforward. People list a bid or ask price, and if someone wants to make a trade at that price, the transaction is filled.

 How does one figure out the market price for ETH-USD on a DEX?

The governing formula to determine market price of a DEX.

DEXs use the constant product formula to determine the ratio of exchange for a given cryptocurrency pair. This formula can be visualized below:

DEX curve visualized.

Where Y represents one token (USDC), X represents the other token in the pair (ETH), and K is a constant representing the total pool value. Providing liquidity (LP) increases the total value of that pool, by contributing an equal amount of tokens on either side.

If I want to spend USDC to purchase ETH, I would swap it at a rate relative to the ratio provided in the formula above:

price = X/Y

and the ratio of X to Y would adjust accordingly. The more tokens available in the pool, the less impact each swap has on the exchange rate.

Price equivalence is maintained through arbitrage. If a DEX has a USDC to ETH price that is way cheaper than on a CEX (centralized exchange) like Binance, a savvy trader could buy up a bunch of that asset, and sell it on the other exchange to make a profit - thereby providing a consistent price.

We wont even get into impermanent loss, which is one of the primary forms of risk in this type of yield model.

LP's are paid for the risk they take on, and as a function of how much that pool is used. For example, when someone wants to switch USDC for ETH, they'll pay a small fee to do so. A portion of this goes to the dApp as revenue, and a portion of this goes to the LPs that make it possible. Depending on how much of the pool you have, the more rewards you get.

LP rewards have the highest yield potential, because they hold the most risk – you can see up to XXXX% annual yield because of it.

Don't try this at home unless you do some heavy research.

3) Lending markets

Have I lost you yet? Over time I can create more content breaking these concepts down into bite-sized chunks.

Lending is much more straightforward.

Lending markets enable a group of individuals to mutually pool their assets, providing a large amount of capital for others to borrow. Since this can be done through smart contracts, it removes some of the risks present in the current financial system, if you were to try this on your own.

You'd also need various licenses for regulatory compliance depending on where you are from.

Currently, borrowers have the ability to take a loan at any time by posting collateral in the event the loan goes unpaid. Usually, this is in the form of a crypto-asset like BTC or ETH. Borrowers will also be required to pay interest on their loan, as they would at a bank. However, in decentralized lending markets, if the value of your collateral, or accural of interest, exceeds the programmed liquidity requirements – your collateral will be automatically sold off to cover the loan.

This is an important point to understand, as crypto loans is one way to prevent a taxable event for a transaction. By posting ETH as collateral, taking a loan out in a stablecoin, then using that stablecoin to purchase something online, a borrower still keeps their ETH, and instead just needs to repay the loan to get their ETH collateral back. No gains realized.

Lending market yield varies based on which market you use, and what type of assets are being lent. Yield can range anywhere from roughly 5%-30%.

Examples of lending markets:

Current market impact:

As of May 30, 2021 there is approximately $100B in crypto assets currently being used in DeFi. $60B of which are on the Ethereum blockchain. Since 2019, DeFi has experienced unprecedented growth, as it established cryptocurrencies and most notably smart contracts, potentially as revenue generating assets.

1 year chart of ETH DeFi TVL.

Total Value Locked (TVL): Represents the amount in USD 'locked' in DeFi smart contracts. This is a general measure to monitor the sentiment of DeFi, along with the available liquidity.

Note that since the crypto market moves together, when there is a crash like we had the last month, TVL will decrease even if there is no change in the actual usage of these applications. Paid crypto analytics sites can provide more meaningful usage metrics. I was able to find total cumulative users (~2.5m unique) but these aren't very useful from a DAU perspective.

Another important metric to track DeFi market impact is fee generation. This will come in various forms: transaction fees, interest, or deposit fees, but that all contribute to each DeFi application's ability to generate income. This is important, as real profit models can now be created, and measured to value some of these projects.

As we can see, some of these applications generate more daily fees than even the Bitcoin blockchain!

Challenges and Risks:

Transaction Fees

As most of the DeFi applications are built on top of Ethereum, this has caused a large demand for blockspace on the chain. As a result, transaction fees for Ethereum have skyrocketed, making it difficult for smaller participants to generate yield. Since transaction fees for protocol use are independent of the transaction size, usage has stagnated to support only large scale investors.

Many improvements for scalability are being worked on, which has created a unique opportunity for competing chains like Avalanche, Solana, Polygon, and notoriously Binance Smart Chain to attract users.

Smart Contract Exploits

Pioneering a space is difficult. Many economic models simply don't work at scale. Also, all smart contract logic is publicly available. This means that savvy hackers can figure out how to exploit a DeFi application, and in some cases, drain an entire liquidity pool; stealing investor's assets. This is just one of many sources of risk available to the general participant. Tread carefully.

Financial Inexperience

XXX% advertised yield from DeFi can attract many inexperienced investors. Many times, a new DeFi application will offer extremely high yields. These have to come from somewhere. Many times, they come from minting a new governance token. This yield is only possible, because this governance token is going through hyperinflation. While you may be earning 123912312 tokens, if the price falls because of inflation – you could end up with less than you started, despite these high yields.

Those who participate need to clearly understand the economic model for these pools.


One of the biggest barriers to entry in traditional finance is that it is highly regulated. Even getting a bank license can be a nightmare in some countries. Canada, we don't love your dependence on the big 5. It is still unclear how governing authorities will react, especially from lobbying pressure from a very powerful group who's lunch could be eaten. While DeFi offers great advantages, this is because the current market for innovative services has been killing off competition. The traditional systems have also passed the tests of time.

Will decentralization prove anti-fragile enough to survive?

Commercial Applications

1) Collateralized Purchases

There is a narrative right now to 'hodl' your crypto, since these assets are appreciating in value so fast, A $10 pizza today, could cost you $10,000,000 in 5 years for the time value of that money. Why spend it? Speculation at it's finest.

The concept of overcollateralized loans, combined with the stability of stablecoins can create a service model that makes it easy to buy goods and services without letting go of your crypto assets. Simply take out a loan, and use the loaned assets to make your purchase. Then, repay the loan at your leisure to get your crypto assets back. If the value of the underlying asset appreciates, the loan interest may even be covered.

This could encourage crypto hodlers to participate in commercial activity more frequently, increasing GMV for merchants.

2) eWallet High Interest Savings

Commerce providers in the payments space have quickly been building eWallets for users to deposit funds into for much faster payment. Yield bearing incentives can be layered in to a potential Shopify Wallet – in order to compete with the likes of Paypal and Venmo as payment options.

A notable project that currently support this kind of functionality, via SDK, is Anchor Earn. Calling themselves the 'Stripe for Savings', this allows anyone to tap into the 20% APY for lending.

Hint: Commercial platforms like Shopify could add eWallet functionalities to their Shop App, tying into Balance and Payments, by offering Shopify Savings: 20% yield by just storing their money in a Shopify eWallet, and easily spending this at any Shopify Payments supported merchant.

Take that, banks and Paypal!

3) Capital Management

When it comes to profits and working capital, there is always an internal conflict for a merchant:

Do I cash out my profits, or do I re-invest it to grow the business?

Remember, our mental model and the relationship between GMV, NVM, and how they impact growth? DeFi can align these incentives to fuel our loops. Here's how.

A commercial platform could support staking mechanics for merchants. As merchants generate income, they could stake their assets to generate yield which can be easily accessed to fund working capital. However, staking yield by yourself isn't that fun – and doesn't provide a large capital asset that could be loaned against.

The concept of  delegating assets can be applied to allow buyers to delegate their assets to a merchant, through the commercial platform interface – earning themselves a percentage of staking yield, or other incentives merchants may layer in. This benefits the merchant by increasing the amount of asset value they manage, and provides an additional income stream through staking commissions.

This type of interaction between buyer and merchant could possibly blow the doors wide open for even more mutually beneficial interactions.

Instead of just a business – merchants could potentially create entire economies centered around their brands.

3) DAOs, micro-economies, new business models

This is where things really start to get interesting. This opportunity is by far the most long shot, and unlikely to happen – but is still in the realm of possibility. If you don't like the grandiose, this section isn't for you. Forewarning.

This technology could fundamentally change how businesses operate.

Merchants could become DAOs that pay their buyers as quasi-shareholders. Yes – ShopFi could enable you to make more money than you spend at a store, by owning part of the economy that flows through it.

So what exactly is a DAO?

Decentralized autonomous organizations are basically decentralized businesses. While traditional organizations use hierarchies and shares to align stakeholders around a common objective, DAOs give anyone the potential to contribute.

Instead of profits, DAOs use economic incentives to align interests, usually involving some kind of game theory. If you need to visualize, picture the ability for any citizen to participate in voting directly on bills, instead of electing an official – and in turn getting rewarded by the economic growth of the country. Any work required to improve a dApp, owned by a DAO starts as a proposal that the community votes on, based on token ownership. Contracted parties that complete their work are rewarded by a community pool of funds, that build up as a dApp earns revenue.

This sounds crazy, it would never work.

Yes, it sounds like some kind of Marxist fan fiction. However, there are live projects experimenting with this governance structure – and succeeding (so far)!

One of the most successful is MakerDAO. This is the team behind the DAI stablecoin. The governance token for this project is MKR. Anyone, at any time, can buy some MKR, navigate to the governance portal, and vote on any active decisions that the community is involved with. Over time, you may even have a good improvement idea and submit your own proposal.

This 5 year old DAO is able to generate $350,000 in daily revenue. Not bad for a business owned by a community, eh?

For more information on the business model for this decentralized business, check it out here.

Only time will tell if DAOs can be sustainable at scale.

That's what's so exciting about this space. Pure, unbias innovation. Survival of the fittest. I could tangent into how anti-fragile blockchain is, and how each failure makes the collective smarter. Since almost everything is open source, another team will pick up where a previous one failed – correcting any fatal flaws, making the network stronger on the next iteration. A topic to dive into another time.

Commercial Applications

A visualization of how this economy could function.

For fun, let's envision how an eCommerce business could one day operate as a DAO. Each stakeholder in the supply chain could be minted a DAO token representing their ownership of the business. Product listings, or changes to the business could be voted on. As products sell, a smart contract could control the payout structure to each stakeholder, along with a community pool, used to re-invest in the business, hire additional contractors, or be used as a form of dividend or 'buyback' by burning some amount of the DAO token. This would allow ANYONE, who believes in the future growth of this business to become a co-owner.

Not only does this help create innovations in commerce, it connects all of the already abundant stakeholders -- directly aligning incentives to grow the business.

We can even look further, to additional applications that involve supply chain transparency.

In a store's smart contract, a DAO could:

  • route a portion of sales to specific charities or goodwill projects.

This could be a great way to advertise your DAO as a social venture, and provide proof of your altruistic intensions when you market your venture to buyers. It's fully transparent and buyers can use this information to select potential merchants.

  • verify that their suppliers are local producers, or socially responsible companies

This type of incentive might not be for everyone, but as Shopify likes to pledge goodwill by planting trees for using their app, there is potential for market differentiation by providing transparency. Especially in today's world. Nobody likes those companies that pocket all of the profits and treats their employees poorly.

Anyway, this is still very much a theoretical concept, that we can explore in depth – and maybe play around with some actual economic models over time as the technology matures.

The point is – this technology is transformational, and current tech leaders should be guiding the positive direction of these projects, as members of the community. There are a lot of scams in an unregulated space.

We need the support of everyone, to help promote the positive elements of this space and weed out the foul actors or speculators.

Closing Thoughts

As exciting as these opportunities are, it is still very early in the technology lifecycle to know how successful they will be. Many of us will be familiar with the notorious during the dotcom bubble. There's a lot of out there right now.

I'll close with a few things to keep in mind, as the space matures, and vendors like Shopify look to get involved:

Hype vs real utility

There's a lot of scams in the space, looking to profit off of hype. Even for well intentioned projects, they still need to pass the test of time to see which models are sustainable. A well reputed brand like Shopify has a lot at stake if they back a failing project. Especially if it negatively impacts their stakeholders.

Shopify Wallet

I'm genuinely curious: Why haven't you guys released an eWallet solution yet?

I won't get into the details here, but there is a ton of synergy with all of your other products not even considering crypto and DeFi. Not to mention the marketing promotions available for cashback rewards, or incentivizing keeping cashflow within the Shopify ecosystem.

Perhaps a form of cannibalization for a revenue stream? Sounds like a good topic for another article in the future. I'm hopeful Shopify Balance might be an experiment that moves towards this outcome.

Shopify's Role

I believe Shopify should be investing in activities that support decentralized finance. Their mission – making commerce better for all – has always been rooted around creating opportunity for entrepreneurship. This involves how people spend their money. Commerce isn't only about retailers.

While DeFi may challenge existing business models or revenue streams, new income generating activities are enabled. The technology offered by DeFi is too enticing to simply watch from the sidelines. I'll be the first to say – the entire cryptocurrency space is risky – but that shouldn't prevent small asymmetric bets from being placed to support the overall mission.

DeFi also creates unique opportunities that support global commerce and developing nations. Many of the largest growing participants of commerce are from these segments. Many who conduct cross-border business frequently. Many who's national currency is pushing them into poverty. The rest of the world can help with this growth, if you help make it easy.

By aligning revenue streams with overall commercial growth, including decentralized finance, Shopify can continue to position themselves as partners to all market participants – no matter how large or small.


  1. Decide on the level of involvement Shopify wants to have on the Payments side. As Shopify Payments becomes an increasing percentage of revenue, is it in Shopify's best interest to compete with the likes of Paypal, or even Coinbase Commerce?  Perhaps they can also reduce their dependence on Stripe or other providers, who may eat Shopify's lunch. I very much see a squeeze on storefront platforms on either side, from payment providers and social media. Commerce is quickly moving to more than just retail products.
  2. Actively support the adoption of safe crypto assets. It aligns with the overall mission and promotes inclusion for global audiences. It's great that Shopify is working with partners to allow cryptocurrencies as payments, but I would like to see more active engagement in the coming months. Would Shopify consider adding eWallet functionality to the Shop App? Shopify could be a huge contributor in the space by making it easier to pay, and get paid with crypto.
  3. Invest in small research and development initiatives that experiment using blockchain technology. Uncover new ways to add value to merchants. Keep the entrepreneurial hat on as you continue to grow into a public behemoth. Now is the time to be building up internal skills, as demand rises for this new technology.

If you made it through this essay, thank you so much for taking the time. I love sharing my thoughts and opinions on technology.

Do you agree with any predictions?

Think i'm downright wrong?

Please, let's connect and discuss. I'm happy to get off the soapbox and listen. It'll help me form better opinions in the future.