The Value of DeFi

🌐 The Value of DeFi

It’s not going away, but will be more important

Bitcoin gave us the idea of decentralized money and networks.

Ethereum followed the Bitcoin success with an operating system for decentralized networks.

And in 2020, we got DeFi Summer. A run in the "usage" of decentralized finance protocols.

This run turned out to be false usage, as tokens were just moved from protocol to protocol in an effort to earn more tokens.

None of those tokens actually had value accrue from the protocol usage.

In layman's terms, more people and more transactions in the exchange don't add to the value of the tokens.

Since that time we've seen more DeFi protocols that offer trading, lending, borrowing. We've seen the growth of more Layer1 chains, as well as Layer2 chains on Ethereum.

Many of the new protocols offer more leveraged trading, unique mechanisms for liquidity, and of course, their own tokens. Earlier this year, we saw airdrops come back for Solana platforms, kicking off more mercenary money grabs.

Recently, Vitalik himself avoided DeFi as a use case he promotes.

Regardless of these negatives, there is still so much value in the system and the protocols in the long term.

Bitcoin’s Goal

The original aim of Bitcoin was to provide a peer-to-peer cash system. From that vision, we brought up the need to disintermediate the current, traditional financial system. So much power was consolidated in the hands of so few. If I can send you something of value directly, I don't need a bank.

Ethereum took that mission further by giving us the operating system to build that network. As I mentioned above, the builders eventually aimed for financialization over infrastructure.

The collective We wants to move toward a more peer-to-peer system. We've been using intermediaries for centuries because we didn't have the technology to overcome the trust and scale issues.

Now we can use code as the trusted technology, so we don't have to trust each other.

Payments

I've talked about payments ad nauseam, and will continue to do so. Having programmable money like stablecoins allows us to interacts financially without banks or custodians. I can send you money, and neither of us needs a bank account. You don't have to trust that I had money in the bank. I can't send it unless I have it.

Decentralized Finance is what gives me the ability to hold stabelcoins, and send them in exchange for something else of value. With the billions of underserved in the US and internationally, the ability to hold and transact will be enormous for financial and economic growth.

Lending and Borrowing

The idea of being able to earn interest because someone else needs money for their own use, and will pay you for it, has been around forever. It's the main reason for the entire global financial system.

We've had to deposit into banks or invest in other companies, and trust them to lend and pay us the interest. That's how we've scaled the system.

Technology now allows us to lend our money without the banks or other intermediaries, and do so at scale. We can also make some of the rules around that lending, including interest rate and collateralization changes.

The flip side to lending is borrowing.

So far we’ve mainly used other crypto-native assets like ETH as collateral. However, as we add more tokenized assets, like BlackRock’s BUIDL fund, we find even better collateral. Assets that aren’t as volatile as crypto, and have transparent values and cash flows.

DeFi lending and borrowing will be key to providing the value in the tokenization effort. Creating a token just for the sake of it doesn’t make sense. However, putting assets on a public chain, and allowing for interaction with the financial system is valuable.

New Investments

Decentralized Finance has already given us new investments we didn’t access to before. Decentralized Exchanges and Automated Market Makers gave us the ability to provide liquidity and earn income for doing so.

We’ve also had the ability to contribute to insurance pools via Nexus Mutual.

These opportunities will continue to grow. We’ll all have the ability to participate as liquidity providers, a realm reserved for the biggest companies in TradFi.

New Use Cases

The programmability of the money and investments will create all new use cases.

We’ve already started seeing streaming money. I can send money that moves from my wallet to another every second. I’ll soon earn my salary by the second, rather than getting paid once or twice per month. I’ll also receive interest payments for money I’m lending by the second. Imagine the change in personal and business cash flows when I can earn and spend by the second.

Some protocols have already used streaming money to create a token vesting schedule. Founders and early investors receive their tokens consistently over time, rather than being handed their tokens with a lockup period.

We also have the ability to tokenize an income stream. My income, whether from work or an investment, can now be an asset itself. I can use it as collateral for a loan or trade it for another asset.

Tokenization and Real World Assets

As we tokenized more Real World Assets like US Treasuries, Real Estate, and Oil Investments, those assets will interact natively with DeFi protocols. We’ll be able to borrow against our tokenized assets, giving us more options for income, expenses, investments, and liquidity. DeFi overall has had some fits and starts over the past several years.

The experimentation and adoption of assets and investments from whiskey barrels to private credit will continue, as will the interaction of tokenized assets with the decentralized finance ecosystem.

DeFi has had its ups and downs, and now is having its own infighting - Ethereum, Layer2s, Solana, sidechains, etc.

However, we’re confident the efficiencies and opportunities to bring capital to a a decentralized, transparent ledger will continue to grow.

Have a great week

Adam