After much anticipation, we are beginning to see real-world use cases for the blockchain as it transitions from abstract, theoretical concepts into practical applications that have the potential to change the standard order. The promise of decentralizing finance by uncoupling transactions and activity from legacy banks to the public via blockchain is driving innovation towards a more efficient system that’s inclusive and not riddled with predatory fees. Algofi is building a fast, low-cost decentralized lending market on the blockchain using the Algorand blockchain. The company, founded by two colleagues at Citadel, believes their platform will be able to offer transaction fees for less than $.01 as compared to $15 for other providers. Crypto depositors can earn high-yield rates on their funds while borrowers can easily access funds with competitive rates for their trading needs. Algofi plans to launch its lending and stablecoin protocol on the Mainnet later this month and introduce new banking features next year as it moves towards becoming a full crypto-native digital bank that’s completely decentralized.
AlleyWatch caught up with Algofi Cofounder John Clarke to learn more about the decentralized finance and companies like Algofi are driving a catapultic shift that will redefine finance as we know it, the company’s strategic plans, the emergence of Brooklyn as an enclave for Blockchain innovation, the company’s recent round of funding, and much, much more.
Who were your investors and how much did you raise?
Algofi raised $2.8 million in seed funding. Union Square Ventures, Arrington Capital, and Pillar VC led the round, with participation from Y Combinator, Formulate Ventures, and Shine VC.
Tell us about the product or service that Algofi offers.
Algofi is building the first crypto native bank powered by decentralized finance. Algofi will launch its lending and stablecoin protocol in mid-December. Through Algofi, users can lend cryptocurrency, earn interest on their deposits, and borrow to facilitate complex trading activity. Further, Algofi is building fiat rails to enable users to move value onto and off of the Algorand network seamlessly. Long term, Algofi endeavors to bridge the gap between the centralized and decentralized financial worlds.
What inspired the start of Algofi?
My cofounder Owen and I have been fascinated by cryptocurrencies since 2014. In 2020, our interests were reignited as decentralized financial applications opened up interesting trading opportunities. We were studying the DeFi markets in 2020 and saw tremendous inefficiencies in part due to a great lack of financial primitives (lending, borrowing, trading). Ultimately, I left the hedge fund space to explore new opportunities. Owen and I reconnected in 2021 and started ideating on things to build in DeFi. We pitched Y Combinator on our vision that DeFi is currently inaccessible to the majority of crypto holders which resulted in us going through the YC Summer 2021 cohort. We later pivoted to building on Algorand where we thought we could add tremendous value given our financial markets experience and passion for building the new financial system.
How is Algofi different?
Decentralized lending opens the door to the new financial system, but one of the barriers for participants has been high transaction costs and slow networks. Because Algofi is built on Algorand, we can offer transactions that cost less than $0.01, compared to $15 or more on other networks. In the long term, we can trust our protocol will scale with the growing number of transactions as the retail and institutional communities embrace DeFi. Additionally, the Algofi protocol supports a native stablecoin, which no other lending protocols currently have. After we achieve a critical mass of DeFi services, we will have built what is functionality a crypto-native institution powered by the new financial system instead of centralized markets.
What market does Algofi target and how big is it?
We target the decentralized financial market which currently has just over $100 billion Total Value Locked (TVL). In other words, there’s roughly $100 billion of crypto value sitting in trading, lending, and yield farming smart contracts across the major networks. In the medium term we see the majority of retail crypto holders currently not in DeFi entering the space as fiat on-ramps and user experiences improve. We also believe as enterprise DeFi tools improve, large financial institutions will enter the space to take advantage of the attractive yields and trading opportunities. At this point, the DeFi market’s TVL could rise to trillions. Long term, we believe DeFi stands a strong chance of completely disrupting the financial system and achieving a massive market size.
What are your post-COVID office plans?
We currently work remotely but plan to get an office post-COVID. We’ve seen a number of DeFi startups sprout in the Brooklyn area. NY has a strong, growing crypto ecosystem.
What was the funding process like?
The funding process was intense. Though YC startups are advised to wait until Demo Day to dive into fundraising, the reality is investors were keen to chat almost as soon as the batch kicked off. When we were pitching investors on our idea to build the new financial system on Algorand, some were dismissive. At the time (and even to this day), building on Algorand instead of other L1s was seen as a contrarian bet. This didn’t matter to us, however; after studying our options, we concluded Algorand had the best combination of technology, community and credibility by far and was being overlooked. Ultimately, we found investors that believed in DeFi and our conviction that we need a scalable network like Algorand to support the new financial system.
What are the biggest challenges that you faced while raising capital?
The biggest challenge was the lack of awareness of DeFi and, in particular, the Algorand blockchain. A lot has happened since we started fundraising that has driven interest in Algorand but at the time we were contrarians to be building there. We felt strongly about what we were building because the early DeFi community responded positively to our launch onto the testnet, with over ten thousand users lending on Algofi. Now investors are embracing DeFi and specifically the Algorand ecosystem and there’s great potential for the next few years.
The biggest challenge was the lack of awareness of DeFi and, in particular, the Algorand blockchain. A lot has happened since we started fundraising that has driven interest in Algorand but at the time we were contrarians to be building there. We felt strongly about what we were building because the early DeFi community responded positively to our launch onto the testnet, with over ten thousand users lending on Algofi. Now investors are embracing DeFi and specifically the Algorand ecosystem and there’s great potential for the next few years.
What factors about your business led your investors to write the check?
First, investors were intrigued with Algofi’s long-term goal to be the first crypto-native bank that bridges the gap between centralized and decentralized finance.
Second, investors found our background compelling. Owen and I met while working at Citadel, a hedge fund and financial services company. I got my degree from MIT, and Owen has a physics Ph.D.
Third, the progress Algofi made while participating in Y Combinator was helpful.
What are the milestones you plan to achieve in the next six months?
The next major milestone is Algofi’s public launch in December. Over the next six months, we also plan to launch a fiat on/off ramp and governance protocol.
What advice can you offer companies in New York that do not have a fresh injection of capital in the bank?
My key piece of advice is to find conviction in what you’re building. For us, we found a strong early community in Algorand that is excited about DeFi and what we’re building. It made the decision to build there much simpler. Even when some investors disagreed, our belief that the DeFi community wants what we’re building has resonated strongly with us. So, simply put, find ways to convince yourself that what you’re building has value.
Where do you see the company going now over the near term?
We’ve hired two strong engineers in the last few months and recently a product-focused builder. As we tackle more projects on the road to realizing our vision, we’ll likely hire some more in 2022. Further, we’ll continue to build and support strong products in the DeFi space.
What’s your favorite outdoor dining restaurant in NYC
I don’t have a favorite but I like Dudley’s in the LES.
