Decentralized Finance – The future of currencies and a driver for the new trend of decentralized business models 

Decentralized Finance is DeFi for short and is simply described as a financial service that has no central controller in place to direct its movement. It is a direct opposite of centralized finance, CeFi for short, which involves a central authority that controls and offers these services. Highly discussed inadequacies of centralized finance include fraud, corruption, inflation, and general mismanagement. 

Why should we be looking towards DeFi? 

To begin to understand how truly game-changing DeFi could be, we have to look no further than already decentralized structures like cryptocurrencies whose innovation was championed by Bitcoin. The use of Bitcoin eliminates the need to depend on humans and suffer the result of some of their inadequacies in our daily lives. It allows people to transfer money to anyone from anywhere without having to go through financial institutions like banks. 

As our world as we know it evolves, we have seen the separation of church and the state which aims to prevent the use of religion as just another means of acquiring power. The separation of money and the state is also coming of age as the ancient deeply flawed theories regarding the control of money are constantly exposed and capitalism is even considered as a way out by some countries. 

These changes provide a pathway to further reduce the margin of having to rely on central controllers and give everyone an equal chance. Decentralized currencies are already taking this evolution to a whole new level but it is only a fraction of the entire financial chain. Decentralized finance could definitely be a logical next step to take. 

Problems Prompting the introduction of DeFi 

It is often said that to get the best of any given situation, it is advisable to leave emotions out of your decision-making. We are humans and the ability to display emotions is amongst one of our most human attributes and emotionless decision making could be a difficult task seeing that financial decisions span large extents and affect so many people at once. 

The effects of emotion-influenced decision-making include corruption, inflation, bailout, seizures, fraud, and gross mismanagement as seen in most nations around the world. The truth is that we cannot completely blame these individuals as not all nations possess a similar pull as some have more than others. This brings home a reflection of the saying “absolute power corrupts absolutely” as the more power of control given to a central controller, the more their emotions begin to take control of their actions. They’ll do everything they can to always have a say in finances once they realize how good the feeling of having a say is. 

SOLUTIONS

Since we understand how emotions play an important role in the way we manage finances and how already detrimental and much more potentially detrimental it could still be, it begs the question, what do we do?. 

The answer to this question could be quite simple, we reduce the dependence on central institutions in making telling decisions. Simply put, finances need to be decentralized and this is where DeFi as a concept comes in. 

As earlier stated, DeFi is a financial service with no central controller which means emotions won’t get in the way of important decision making. This in turn breeds transparency and fairness to lending, borrowing, storing, and more and these are probably against the rigidity ancient deeply flawed theories could provide.

Centralized and decentralized finance sort of provides two separate worlds for people to live in and it gives users a choice to make. CeFi is usually characterized by arbitrary inflation, block trades, arbitrary bailouts, and limited alternatives which results in slow change amongst several others while DeFi, on the other hand, provides clear monetary policies, untouchable assets, global alternatives which in turn provides a platform for rapid innovation. 

As we all probably know, finance is quite a broad concept that involves lending and borrowing, trading, betting, insurance, farming, and many others. From earlier paragraphs, it is understood that DeFi aims at providing a revolutionary change to the way we do things especially as regards finance, and with every revolutionary movement, certain front liners are available who both utilize these services and provide them to others. In the coming paragraphs, we try to explore some of these frontliners in various fields and understand how they function as well as the services they provide. 

Major Players in DeFi 

LEND + BORROW

Finance as we know it is partly fueled by the ability to lend and borrow. It is particularly important to keep this aspect in check as it could easily lead to inflation but through Aave, a decentralized liquidity market whose transactions are not possessed by a third party at any stage, individuals are able to participate as depositors or borrowers. 

Aave allows depositors to provide enough liquidity to the market while borrowers are able to borrow on two levels of collateral. The deposited funds are allocated to a smart contract and the code of this smart contract is open source, public and formally verified and audited by third-party auditors. 

The legal financial system being managed by individuals is usually characterized by being slow, inefficient, and probably constrained by emotions. Decentralized finance provides a way to remove these emotions from getting in the way of business and an example of this setup is seen in Compound Labs which is an open-source software development company that provides tools for the DeFi ecosystem.

Compound allows for short-term lending and borrowing of ethereum based assets. With compound, users can lend out their Ethereum based assets that are able to compound interests immediately. Compound promises a much higher interest rate as compared to other traditional institutions and an algorithm determines how much interest is obtained based on market liquidity and market utilization. 

A particularly fascinating aspect of decentralized finances is how it does not really need a large body of developers to develop it and continually run it. A company named dYdX goes on to prove this. This company was developed by a five-person group and has since been established as a DeFi empire and its margin trading protocol is also based on ethereum. 

dYdX bears a bold hallmark of one of DeFi’s major characteristics which is the use of a middle man to mediate transactions. s it gives users the freedom to create their own cryptocurrency-based financial products like short sells, long positions as well as interest-bearing loans. 

Just like the already listed lending and borrowing DeFi companies, C.R.E.A.M is a part of the yearn ecosystem and is also a lending protocol that eliminates third-party interference in lending for individuals. It is a permissionless, open-source and blockchain agnostic protocol that is based on the Ethereum blockchain. C.R.E.A.M functions like normal savings account as users can keep their cryptocurrencies and keep earning profits on these assets. 

Yet another impressive DeFi effort is Fulcrum which takes another approach to lend and borrowing and this approach is one of tokenization which allows users to earn interests on borrowed funds and p Tokens which in turn ensures composability of margin protocols. 

Still committed to creating a common ground for lenders and borrowers to align, there is Notional which is built on the secure Ethereum blockchain and facilitates fixed-rate as well as fixed-term crypto-asset lending and borrowing through fCash. fCash is a free credit balance and its balance represents funds held by Fidelity and is payable to its owners on demand. 

A particular advantage of decentralized finance is the flexibility it provides individuals to operate with and a shiny example of this is seen with a DeFi platform known as Torque which goes on to demonstrate this. Torque is a decentralized finance platform that allows users to access crypto-backed loans with fixed interest rates and indefinite-term loans.  Torque is powered by those behind fulcrum. 

TRADE

As we most probably know by now, finance as a large name contains several aspects and another particularly important part of this is trade which in normal terms is defined as the buying and selling of goods and services. This definition is the same with decentralized finance just that the rigidity in terms and conditions for trade to occur as well as dependence on third parties and intermediaries are removed and replaced with flexibility and an ability to broker your own trade by yourself. 

An example of a DeFi platform that helps to coordinate trade is Uniswap which eliminates the use of intermediaries and replaces them efficiently with a decentralized system that prioritizes the security of transactions. To replace a central intermediary, Uniswap uses smart contracts to make liquidity pools and markets that are compatible with each other. The replacement of intermediaries with smart contracts means that enforcement costs, frauds, and more are avoided since the smart contract is a self-executing contract. Another platform quite similar to Uniswap is Curve which allows trade-in stable coins. 

A particular characteristic of any innovative idea lies in its ability to deviate from what is generally known as normal while still developing a system that works. SushiSwap is an example of this sort of innovation as it is a platform that allows everyone to provide liquidity instead of restricting it to a single entity or group of individuals. Providing liquidity means individuals actively funding a liquidity pool to ensure the smooth running of trades in that space. It is quite similar to Uniswap and providers of liquidity are rewarded with a token (s) or SUSHI tokens. 

To make for an efficiently working decentralized system, several tools need to be put in place. From these tools, a set of experiences may be observed and a particularly common experience during the traditional trade is price slippage which could be zero, positive or negative. Price slippage refers to a different entry and exit price as compared to that which the computer predicted. A particular advantage decentralized finance offers is in its ability to remove or reduce the effects of sentiments from transactions as well as aid informed decision making for everyone and that is exactly what it does with 1inch does as it collects data from multiple exchanges and helps users access the most liquidity, the best crypto exchange rates as well as limit price slippage. 

Yet another innovative idea that has been born out of DeFi is PancakeSwap whose food-themed name sort of hides the services it provides. It is a decentralized exchange for swapping BEP-20 tokens and its main focus is to further extend Ethereum’s capability. PancakeSwap adds a host of bonus features including farming and staking which ensures liquidity for various pools and allows participants to earn CAKE tokens, exchange as well as lotteries for those who have received CAKE tokens. 

The availability of various platforms capable of handling various tasks and functions is a part of what makes DeFi a sustainable system. From lotteries to the reduction of price slippages, DeFi is doing a great job at balancing every aspect of the financial system, and to take these steps further, we have Balancer which still moves along with the whole decentralized finance theme as it erases the need for a portfolio manager to continuously rebalance funds as it allows anyone to create a self-balancing index fund which also allows users to earn as they are able to collect fees from traders who also rebalance users’ portfolio as well. 

A host of other companies are actively providing trading services to keep the DeFi trend moving and not just moving but moving with improvements. Some of these companies include; Synthetix which is a platform for synthetic assets and aids trading by tracking the value of real-world assets, Opyn which allows users to buy and sell options on Ethereum, and finally, dYdX which actively fuels decentralized margin trading. dYdX, like most DeFi platforms, is open, trustless, and non-custodial. 

FARM

While the word “farm” may seem quite familiar to most individuals in its entirety, it holds a quite different definition in decentralized finance. Farming in other words is described as liquidity mining and it allows users to generate rewards with cryptocurrency holdings. Rewards are handed out through a smart contract containing funds so by providing to the liquidity pool (smart contract), rewards are handed down to participants. 

While the term farming in decentralized finance may not be similar to what we all know farming to be, it does share some similarities as yield farmers have to tend after their yields like crops and also utilize necessary strategies to get the very best yields. 

Below, we try to explore some tools that make liquidity mining in yield farming quite easy. 

To make for efficient mining processes, it is quite important to have a range of tools on hand for efficient service and one of this is Yearn and this is a group of protocols that are first independent of third parties and intermediaries and also allow users get the very best interests from lending out their crypto assets while running on the Ethereum blockchain. With an aim to provide a highly rewarding system, Yearn.finance built a system of automated incentives around its YFI cryptocurrency. 

To put a figure on just how much progress is being made in this aspect of decentralized finance, upon the first month of introducing Yearn, nearly $800 million in assets were attracted. 

Next on the list of active yield farming tools, we have Harvest which functions to provide all farmers with the highest yield available along with several decentralized protocols. A particular catch to the whole decentralized finance system is its ability to give everyone an equal chance of participation and the diversity in platforms providing various services assists in this. Harvest as a DeFi farm platform provides its users with updates on the newest DeFi platform with the highest yield and then optimizes yields with the latest farming techniques and working in this manner means it is able to effectively help users make excellent investment decisions with little work. 

In the list of efficient yield farm protocols, there is Akropolis which utilizes an easy-to-use yield aggregator product with the very best yield aggregation strategies to hand users the tools to save, grow and provide safety for their assets.  

Finally, we have bEarn Fi which allows trading across different blockchains and provides for yield generation, algorithm stablecoin, treasury, and governance. bEarn FI runs on the Binance smart chain blockchain and Ethereum blockchain. 

INDEX

The entire cryptocurrency sector has been on a sort of an impressive run in the last couple of years with several cryptocurrency types evolving and several cryptocurrency sectors also constantly being produced to continually support the decentralized nature of this economy. The year 2020 was a particularly wonderful year for Ethereum as a cryptocurrency as its use and investments into it have surely risen up several notches and with this increase, there has also been a considerable increase in the number of people willing to own DeFi governance tokens. 

Owning DeFi tokens isn’t the easiest of tasks actually as participants would have to trade each individual token one by one and as a single entity. This process is generally time-consuming and even costs more obviously. 

But with decentralized finance as an innovative tool, with every problem comes an unequal solution and to respond to the extended period of time and resources it takes to own DeFi tokens, we have DeFi indexes which are baskets of DeFi tokens that allow investors get gain on the DeFi arena by purchasing a single token. Purchasing this single token allows investors to trade in and out of the DeFi sector quite efficiently. Below, some DeFi index tools are discussed. 

The first on this list is DeFi Pulse Index which further reinforces what decentralized finance is at it gives everyone an ample opportunity to get the very best out of the space and it does this by assisting newcomers in getting an easy entrance into the DeFi space while helping already established users access to DeFi by single asset purchases. DeFi Pulse index is a market capitalization-weighted index that tracks the performance of decentralized financial assets and consists of ten tokens which allow for 1-click exposure rebalances every month. 

Next up, we have Indexed Finance which is basically targeted at passive portfolio management on the ethereum market. Instead of having to manage funds on the stock market sort of manually, we have the introduction of index pools which are a set of capitalization-weighted index pools that are designed to behave the exact way index funds behave thereby gaining far more interests just like index funds which are primarily known to gain more. Just the way index funds operate in the stock market, so do Index pools operate in the DeFi space as well as it allows ownership of an asset that represents ownership of a diverse portfolio that tracks the market sector that the index represents.  

From time to time, Index pools regularly rebalance their underlying assets to better represent the market they track. 

Still keeping with automated and stress-free wealth creation, we have PieDao which is a decentralized asset manager for tokenized portfolios. It is a community decentralized autonomous organization focused on tokenizing automated wealth creation strategies. The members of the organization are able to vote on various matters related to the tokenized items. 

The system components of this community are called PIEs and users or members can propose new PIEs and could also suggest adding or removing certain features on PIEs. PIEs represent synthetic assets and each PIE can be swapped with its link asset.

Finally, on this list, we have Set which is a company that provides tools to empower developers, fund managers, and investors to interact with crypto compositions that are more valuable than their individual parts. 

BET

Innovation as a term is a quite broad one and it is particularly described as one that has the capacity to change how a lot of processes are undergone. Decentralized finance fits right into this bracket as it revolutionalizes how several sectors perform and one of these is the betting sector and it is quite obvious how DeFi would affect this sector. Betting has been a term associated with finances since time immemorial but since it has been mediated by man, it is quite prone to be manipulated as emotions begin to affect decision making and with this manipulation comes bias in the entire betting process. Even apart from manipulations, commissions paid to bookmakers could be quite high at times. 

Decentralized finance as has been portrayed all through this text introduces the need to not have to depend on a third party in mediating transactions and this is the same with betting as DeFi would ensure an open, online, international market without having to deal with a bookmaker and pay commission fees. 

Apart from just providing an open and safe betting channel,  DeFi could also unlock new betting phases. Below are some platforms already embracing DeFi mediated betting; 

First off, we have Augur which is a peer-to-peer betting platform that allows participants to bet on various categories from sports to economics and more. Traditional betting schemes make betting seem like a get rich scheme but these are mostly ploys to get the most out of their patronizers but with Augur, this isn’t the case as it uses blockchain-based predictions to give bettors a financial incentive to seek the truth without having to contend with a centralized system. 

Augur provides a transparent exchange with no limit to what users can bet on and instead of charging high fees upon high wins, Augur allows users to keep a larger percentage of their winnings. Since it is a peer-to-peer decentralized platform, it allows universal and transparent access to its markets. 

Still, keen on offering decentralization in the betting aspect of finance, we have Gnosis which is an open-source, decentralized prediction market built on the blockchain and allows users to create markets where users can speculate on random outcomes of any event. Gnosis functions based on the Ethereum protocol to guarantee a secure and transparent ecosystem. 

Another perk to the introduction of decentralized finance to betting is its ability to ensure betting on a wide range of options and a platform that practices this is Polymarket which allows users to bet on their beliefs. Polymarket is an information-based market platform that harnesses the power of free markets to simplify real-world events and help people filter what matters most to them and make decisions based on their beliefs.

Finally, we have Omen which is a fully decentralized prediction market that allows anyone to create a prediction market. Omen works based on the Gnosis open-source conditional token framework.  

INSURE

Other sectors of decentralized finance like lending, borrowing, trade, and even yield farming have garnered quite some attention but a particular sector that is less talked about is insurance. In a short while, this may no longer be the case as the efficiency of decentralized finance could certainly be useful in insurance because the insurance sector is a generally risky one and it is quite important to put in place a mechanism that reduces the incidence of frauds and protects against risks and threats. 

Since decentralized finance operates in a trustless and transparent manner, it has the potential to reduce the unethical and illicit functioning of the insurance system. Decentralized finance in insurance isn’t just a theory as some companies are already actively using this to great effect. Some of these are discussed below; 

A company currently efficiently using the DeFi insurance space to great effect is  Cover which is a Peer-to-peer insurance marketplace that utilizes ERC-20 fungible tokens to offer permissionless and non-know your customer coverage. The cover protocol allows DeFi users to be protected against smart contract risks and it stabilizes the turbulent DeFi space for newcomers by instilling confidence and trust between protocols and their users. 

Nexus Mutual sort of erases the need for insurance companies as it is an ethereum powered platform that allows people to share the risks together without dependence on insurance companies. Nexus Mutual also offers smart contract covers to protect against potential bugs in smart contract codes and offer protection in cases of hacks. 

Not only does decentralized finance offer protective services in terms of insurance, it also enables users to create their own decentralized finance platform where people are able to create their own markets. One of these platforms is Opium Insurance and this platform offers tradable, tokenized insurance positions while also offering covers for smart contracts, credit default events, insolvency, impermanent loss, and more. 

To finally close up our discussion on the insurance aspect of decentralized finance, we have Tidal which is a Polkadot-based insurance platform and is a balancer-like insurance market that allows users to create designed insurance pools for one or more assets. Tidal also allows users to buy and sell insurance for their assets and smart contracts across multiple chains. 

TOKENIZE

A particular aspect that makes decentralized finance quite efficient is asset tokenization which helps to dematerialize assets by moving from physical certificates to electronic bookkeeping and in turn provides space for eligible investors to be digitally subscribed. Through tokenization, new and improved types of securities are made available for investment. In the coming paragraphs, we try to discuss some companies already taking tokenization to higher levels. 

Alternative investments are financial assets that are different from conventional equity/income/cash categories. They include investments like private assets, real property, commodities, and more. This space is gaining ground in the financial field and it is only expected for decentralized finance to have a say on how things are done in this space and with Harbor, users are able to tokenize alternative investments. Harbor streamlines the alternative investment experience for investors, issuers and their placement agents and even makes for liquidity in traditionally illiquid assets. 

Tokenization allows for automation of electronic trading as well and already established sectors in tokenization like the real estate sector automatically provides a blueprint on which other sectors can thrive. 

A particularly important aspect of decentralized finance is that it can be used by several individuals across various levels. Polymath ensures this as it makes it easy to create, issue, and manage digital tokens on the blockchain. Polymath makes it easy for users to unlock and trade traditional and new classes of assets. 

Another company actively aiding in tokenization is Centrifuge that allows users to tokenize and collateralize real-world assets. In Centrifuge, real-world assets originate onto the centrifuge chain via tokenization and this means a physical world document becomes replicated as an NFT, through a smart contract and this NFT represents the value of the asset/document. 

Centrifuge also utilizes privacy-enabled NFTs which are tokenized representations of assets/documents, keeping some assets attribute private while a public ledger tracks the asset ownership. 

Finally, we have Templum which is a team of seasoned capital markets professionals and entrepreneurs on a mission to give investors the opportunity to access alternative assets that insiders have. 

What are we to expect with the emergence of decentralized finance?

All through this text, the relevance of decentralized finance in creating a financial system that is independent of human emotions and flaws in its runnings has been highlighted. A decentralized financial method means that no central body controls everything going on in the financial world and this, in turn, reduces cases of inflation, fraud, price manipulation, and more hence, providing a level plane ground for businesses and individuals to thrive. 

Just as finances spread across a broad category of actions, so does decentralized finance as well. We have seen how efficiently it works in lending and borrowing, tokenization, trading, betting, and more. The incredible innovation decentralized finance promises, as well as the entire cryptocurrency bandwagon, means several changes are expected to occur as progress keeps being recorded in this space, and some of the changes that may occur include; 

• NFT collateralization – NFT is short for non-fungible tokens and is described simply as tokens that are unique and non-replaceable. NFTs are particularly valuable being that they are scarce and the more scarce a product is, the more valuable it becomes. Decentralized finance is popularly known for providing independent financing and to maintain a trustless system it offers, NFTs may begin to be used as collateral. Peer-to-peer lending is also to become something of a norm with tokenization of NFT loans also acting to keep things firm as upon loan acceptance, NFT gets locked in the NFTfi smart contract as is seen with NFTfi marketplace.

• Access to longer-tail cryptocurrencies – long tail cryptocurrencies are less popular and have low trading levels. These currencies are generally not accessible to most individuals but with the emergence of decentralized finance, new ways are developed to meet up with the ever-demanding innovation decentralized finance provides and a means to do this would be to discover new mining grounds and this is what long-tail cryptocurrencies provide.  GBTC, ETHE, and Bitwise 10 are just the beginning and individual retirement accounts like  Choice and Alto helps to even pack multiple investments in one.

• Uncollateralized and undercollateralized loans will become common – Collaterals are to be expected, a common theme when individuals are probably lending out funds to strangers on the internet through an aspect of decentralized finance. Through collateralization, billions are locked up as collateral fuelings in the defi industry, and to fully gain from this large amount of investments, removing collateral from loans handed out may become quite a thing. This does not signify that lenders are no longer accountable but there would be other processes put in place to guarantee lenders are treated right.

A particularly common aspect of this is credit lines introduced by Aave which are a preset borrowing limit that can be tapped into at any time. In credit lines, the collateral holder may decide to make certain requirements compulsory for those they delegate to. Other companies also practicing credit delegation which Aave v2 provides include; Union Protocol, Goldfinch, Teller and TrueFi. 

• Laws will continue to lag – technological innovation is not time-bound as virtually every second, new innovations are introduced virtually every day so it becomes difficult for laws to be made against every developing innovation. Since decentralized finance is aimed at reducing dependence on third parties, questions regarding new methods put in place to ensure transparency is to be expected. Some of these questions include; is wrapping bitcoin a taxable event? How should rDai and cUSD be treated? The length to which some of these innovations may grow are quite fascinating and most definitely, traditional legislature may not be able to cover these changes. 

• We’ll see more aggregators – aggregators are computer programs that collect related items of content and display them or link them to aid in decision making processes. Seeing that decentralized finance operates in an open system, Yield, liquidity and marketplace aggregators are made possible by interoperability. 

Seeing how efficiently these aggregators function especially through decentralized finance, its efficiency may be explored in other sectors as seen with social aggregators. 

• We’ll see the rise of protocol politicians –  Concepts like bonding curves and optimistic rollups mystify most of us. These politicians will be tasked with understanding changes and representing interests. Vote delegation and pooled governance hint at the future. 

• Money will move faster –  SushiSwap rose to $1B in TVL days after launching. Forks and well-known form factors will grow the fastest because of pre-existing mental models.

• Assets stored in traditional banks will be burdened by barriers to exit and confiscation risk. DeFi enables yield farming and strong property rights.

Opportunities the growth of decentralized finance may provide 

We have seen through this text what decentralized finance entails and the events to be expected as this financial method rises to prominence. As was seen with Bitcoin and other cryptocurrencies, the rise of decentralized finance could be quite meteoric and it may be quite important to understand a load of opportunities this emerging sector could provide. Some of these opportunities include; 

• Being decentralized means not having to depend on third parties or mediators of financial transactions to move finances easily and with DeFI several communities are even available to help you along your journey.  An example of this community is Bankless which helps people who are new in their crypto journey by handing out tech-inspired insights for informed decision making. 

• Decentralized finance and the entire crypto space provide an extra space to earn income as it is already seen in Gitcoin which lets you “work for the internet.” Lewis Freiberg earns his highest salary ever ($180,000) as a community manager for ESD. 

• Get exposure to baskets of assets. Be bullish on DeFi without the need to pick winners. PieDAO, DPI, and Indexed Finance help you index. Indexing provides a means for automated wealth creation as it constantly feeds participants with the best crypto assets to invest in. 

• As a relatively emerging sector compared with traditional sectors and one with real potential to entirely change how things are done, the crypto space provides a huge investment gold mine. Aave and Compound are decentralized options while BlockFi and Celsius are centralized options that provide impressive returns on investments. 

• Apart from investing or trading the cryptocurrency market or the decentralized financial world in general, there is also an opportunity to build a DeFi newsletter and/or community to assist newcomers into the field. Since this sector is still in its early days, newsletters and communities would be met with proper appeal as the market matters most.

• A manner through which decentralized finance makes decisions on issues regarding how it runs is through governance tokens obtained by consistent involvement in the operations of the crypto set. Availability of governance tokens could provide a means for individuals to become network principals and participants with governance tokens. Benefit from networks that you contribute to. Without waiting 8 years for an IPO. UNI and Uniswap already offer these services. 

• Decentralized finance provides a wider range of financial choices to make. For example, If you’re bullish but need liquidity, borrow instead of selling. Borrowing, unlike selling, isn’t a taxable event in some jurisdictions. Gains are retained after loan payback. Losses will trigger collateral sell-off with added penalties. 

• Build a tokenized community. Friends With Benefits members buy $FWB to join. The price fluctuates with the success of the community. Leading to deep member alignment. 

• Protect against smart contract bugs with insurance that allows users to buy specified coverage on anything in the market. Overcollateralized loans are not risk-free. $11m was drained from this vault. 

• Amplify arbitrage opportunities with flash loans. Borrow unlimited amounts by paying the loan back in the same transaction. Someone borrowed $8,000,000 to make $60,000 with a flash loan. @ceterispar1bus made $40,000. Someone else made $3.5m. 

KEY LESSONS

Having learned what decentralized finance including the opportunities it provides, here are some things to note in this new and emerging sector; 

• DeFi is unstoppable. There’s no single point of failure. Nations that attempt to ban crypto set citizens behind culturally and financially. 
• We’re living in a lag. Strong property rights, programmable money, and permissionless loans are here. Awareness isn’t evenly distributed.
• DeFi is antifragile. Hacks strengthen the system. Bans prove the need for DeFi. Like Hydra, when one head is cut off, two grow in its place.
• DeFi brings creative destruction to CeFi. Yield farming, flash loans, and AMMs are unprecedented. 
• We’re seeing a (mostly) peaceful transfer of power. Politicians are buying crypto. Crypto leaders are lobbyists. Centralized institutions (Square, PayPal, SoFi) use crypto to compete with one another. Crypto ETFs are available on stock exchanges.
• Forks are forcing functions for fairness. Fork threats keep power in check. Network participants can choose the world that they want.
• The jobs to be done of nations are changing. We took the church off their hands. We’re taking money and public goods. What’s left? Internal policing and external protection?
•  Like AI. DeFi is amoral. It amplifies intentions. Flash loans lead to hacks and improved security. 
• DeFi, although a worthy alternative to the traditional banking system, is not particularly perfect as mining the cryptocurrencies used in fueling this economy consumes more electricity than some countries. Also, Lost keys mean lost funds. Self-banking isn’t easy.

NEGATIVE VIEWS

As expected with every innovative idea, certain points could be made against the introduction of the introduced innovation. The points against the innovation may not necessarily be to bring the newly introduced system down, but it may be a way to prove the system against the occurrence of the predicted negations and provision of a satisfying reply to these negations means the system is proofed against any of such questions in the future. Some of these questions include;

“Is this financial advice?”

The credibility of decentralized finance and its ability to release common individuals from the shackles of financial institutions doesn’t make it a be-all of economy. Personal research is required before delving into this space. 

“Mining harms the environment.”

Layer 2 solutions are live. Proof of Stake is live on some chains and coming to Ethereum. 

“CeFi isn’t going away.”

You’re probably right. I think we’ll see “fat” trustless (DeFi) layers and “thin” trusted (CeFi) layers. Anchorage is an argument for intermediaries. Decentralization isn’t perfect. Nothing is.

“I can yield farm in CeFi by moving my money between banks.”

With low rates and high friction. Good luck. DeFi’s 20%+ APYs aren’t sustainable but interoperability is here to stay. 

“This will be used for nefarious purposes.”

“But magic is neither good nor evil. It is a tool, like a knife.”

“What about scaling issues? (Gas prices)”

Layer 2 solutions are here. Polkadot and Binance Smart Chain compete with Ethereum.

“This sounds too good to be true. You say there’s no free lunch. What’s the catch?”

You can travel cross country by train but most of us don’t. Flight saves time. But you’ll miss some scenery. CeFi is a train. DeFi is a plane. Net positives are possible. Panaceas are not. 

Centralization helps teams move fast. Some projects progressively decentralize as they mature.

“Crypto is volatile.”

🔗 Links

1. When Owning Gold Was Illegal in America • “…gold ownership—both in coins and in bars—illegal for all Americans and punishable by up to ten years in prison. Anyone caught with gold would also have to pay a fine of twice the amount of gold that was not turned over to the Federal Reserve in exchange for paper money.”
2. The Future Of Finance Explained • A video covering the history and future of finance. 
3. Robinhood Blocks Buying in GameStop, AMC, and Other Stocks • Centralized exchanges arbitrarily halt trades.
4.  The Creature from Jekyll Island • On the origins and intentions of the Federal Reserve. 
5.  DeFi Pulse • Shows the total value locked in DeFi. A 35,900% increase from 2018 ($50m) to 2021 ($18b). 
6.  Scalability Trilemma • On the tradeoffs that crypto projects make between decentralization, security and scalability. 
7.  M1 Chart: The Stock Market Adjusted for the US-Dollar Money Supply • The US stock market adjusted for inflation. 
8.  A Beginner’s Guide to DeFi • A primer on key areas of DeFi including stablecoins, insurance and exchanges. 
9.  Cryptocurrency CEO Donated Second-Largest Amount to Joe Biden’s Campaign • More evidence of a smooth transfer of power from traditional to decentralized finance. 
10.  Miami Vies for the Title of ‘Bitcoin City’ • Mayor Suarez says he aims to pay city employees in Bitcoin.