Trends #0039 โ€” DeFi (Decentralized Finance)

๐Ÿ” Problems

๐Ÿ’ก Solution

Bitcoin decentralized money.

Decentralized Finance (DeFi) does the same with lending, borrowing, trading, insurance, identity and more. Mostly on Ethereum.

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

This combination leads to new possibilities like flash loans, yield farming and who knows what else?

๐Ÿ Players

DeFi Projects

  • Ethereum โ€” a decentralized open-source blockchain. The backbone of DeFi.
  • Maker โ€” a decentralized credit platform.
  • Compound โ€” an open-source money market protocol.
  • Aave โ€” an open-source, non-custodial protocol to earn interest on deposits and borrow assets.
  • bZx โ€” a decentralized protocol that enables lending and borrowing for margin trading.
  • dYdX โ€” a non-custodial trading platform.
  • Uniswap โ€” a fully decentralized on-chain protocol for token exchanges.
  • Balancer โ€“ a non-custodial portfolio manager, liquidity provider and price sensor.
  • Yearn โ€” a collection of yield farming vaults, yield-aware money markets and pooled insurance coverage.
  • Nexus Mutual โ€” a decentralized insurance platform for smart contract bugs, failure or black swan events.

๐Ÿ”ฎ Predictions

  • 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.

โ˜๏ธ Opportunities

๐Ÿ”‘ 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.

๐Ÿ˜  Haters

โ€œWhatโ€™s wrong with the current system?โ€
It works, for now, if you live in the right place and have access to financial services. If not, good luck. 

โ€œWhat about hacks?โ€œ
See antifragility. 

โ€œThis canโ€™t scale.โ€
You may have a point. For now.

โ€œDeFi is used for illegal activities.โ€
See Nir Eyalโ€™s test of a superpower. DeFi is also used for remittances and escaping hyperinflation.

โ€œIs this tax or financial advice?โ€
No.

๐Ÿ”— Links

  1. What is DEFI? Decentralized Finance Explainedย โ€ข An introduction to DeFi.
  2. Why Decentralization Mattersย โ€ข Chris Dixon on how centralized networks become zero-sum once market power is established.
  3. Crypto Memes and Adoptionย โ€ข Linda Xie on memes, mass movements and natural experiments. โ€œArgentina 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.โ€