DeFi Project Backed by Polychain and DragonFly Capital Shuts Down

Decentralized finance project Paradigm Labs — backed by veteran crypto investors Polychain Capital, Dragonfly Capital, and Chapter One Ventures — is shutting down.

In an announcement yesterday, March 10, CEO and co-founder Liam Kovatch said the closure was due to Paradigm’s “failure to carve a viable niche in the DEX [decentralized exchange] marketplace” and to factors both “within and outside” of the team’s control.

Out of step with a fast-evolving DeFi landscape

Founded in 2018, Paradigm Labs raised an undisclosed amount in seed funding for the development of a product dubbed Kosu — a liquidity aggregation protocol for DEXs.

In the span of these past two years, Kovatch wrote, the DEX landscape has “evolved considerably,” with the result that many of Paradigm’s early efforts and investment in Kosu were “made obsolete” by changes in DEX market structure:

“We’ve been able to observe significant developments such as the launch of Uniswap, the establishment of the decentralized finance (DeFi) movement and more. While exciting and positive for the community at large, these developments have made the DEX space incredibly fluid, and challenging for an organization like ours to navigate.”

Kovatch revealed that Paradigm Labs began to doubt Kosu’s viability in the rapidly changing DEX ecosystem by early to mid-2019, due not only to Uniswap’s popularity but also to early developments on the DEX protocol 0x (ZRX).

Amid an increasingly “crowded liquidity protocol/networking ecosystem,” Kovatch noted, the team designed a new product — a non-custodial request for quotation system dubbed Zaidan, built on 0x. This idea, however:

“Came to us late in the company’s life cycle at which point we were under-resourced to fully develop Zaidan [...] were quite hesitant to pivot completely away from Kosu due to the investment we had made in the project. In retrospect, this hesitation was a mistake. ”

Overall, Kovatch attributes Paradigm Labs’ failure to being “a bit too early” an entrant into the DeFi space, and the project has now found itself unable to secure the necessary funding to develop Zaidan into a live trading system.

Breaking down the acronyms

DEXs — or non-custodial, decentralized crypto exchanges — enable users to trade peer-to-peer, using smart contracts to automate deal matching and asset liquidation in order to allow users’ funds to remain under their control. Their sluggish adoption has to date broadly been attributed to their low liquidity rates relative to established centralized counterparts.

Meanwhile, DeFi is used to designate the decentralized finance market — or the use of blockchain, digital assets and smart contracts for financial services such as credit and lending.

DeFi in 2020

In early February, locked-up assets in the DeFi market — i.e. across its spectrum of smart contracts, protocols and decentralized applications — hit a milestone $1 billion in value. This represented a fourfold increase year-on-year.

Later that month, however, the sector saw a setback, falling by $140 million from its peak of $1.2 billion on Feb. 18. This followed a series of back-to-back “flash loan” attacks on the decentralized lending protocol bZx.