- Centralized finance consists of groups that add unnecessary fees and friction.
- Governments can create negative externalities, including “public” debt and hyperinflation.
- Centralized systems can block individuals and nations.
Bitcoin decentralized money.
Why does this matter?
- DeFi allows everyone to access financial services
- Switching costs are lower
- Power is more distributed
- Sending and receiving funds is generally faster and cheaper
- DeFi is antifragile
- Ethereum — a decentralized open-source blockchain. The backbone of DeFi.
- Maker — a decentralized credit platform.
- Compound — an open-source money market protocol.
- Aave — an open-source, non-custodial protocol to earn interest on deposits and borrow assets.
- bZx — a decentralized protocol that enables lending and borrowing for margin trading.
- dYdX — a non-custodial trading platform.
- Uniswap — a fully decentralized on-chain protocol for token exchanges.
- Balancer – a non-custodial portfolio manager, liquidity provider and price sensor.
- Yearn — a collection of yield farming vaults, yield-aware money markets and pooled insurance coverage.
- Nexus Mutual — a decentralized insurance platform for smart contract bugs, failure or black swan events.
- New financial concepts will be created. Flash loans, yield farming and liquidity pools are here. Linda Xie writes about experiments made possible by interoperability and composability.
- Networks of the future will be more postive-sum, by necessity. The open-source nature of DeFi lowers switching costs and balances power between principals and participants.
- Financial embedding effects will weaken. Interoperability lowers switching costs and lock-in. This makes yield farming, exchange aggregators and vampire attacks possible.
- Use tokens to get early buy-in for your platform. See the Basic Attention Token (BAT) from Brave and MOON from the r/Cryptocurrency subreddit.
- Find Micro-SaaS opportunities in DeFi. TokenTax and CryptoTaxTools spotted a niche.
- Build better user experiences in DeFi. Streamline use cases and make easy-to-use applications. See Donut, Zapper and Cash App for inspiration.
🔑 Key Lessons
- Decentralization is a spectrum. Small groups may retain control of “DeFi” projects via admin keys or concentrated governance tokens.
- 0 to 1 rarely happens. 1 to N is rapid. Once something is proven, replicas quickly follow. Roger Bannister and Bitcoin have more in common than you think.
“What’s wrong with the current system?”
It works, for now, if you live in the right place and have access to financial services. If not, good luck.
“What about hacks?“
“This can’t scale.”
You may have a point. For now.
“DeFi is used for illegal activities.”
See Nir Eyal’s test of a superpower. DeFi is also used for remittances and escaping hyperinflation.
“Is this tax or financial advice?”
- What is DEFI? Decentralized Finance Explained • An introduction to DeFi.
- Why Decentralization Matters • Chris Dixon on how centralized networks become zero-sum once market power is established.
- Crypto Memes and Adoption • Linda Xie on memes, mass movements and natural experiments. “Argentina seems to have a perfect use case for crypto with the environment of high inflation, restrictions on accessing the dollar, and limits on sending money abroad.”