Will crypto become mainstream and take over the world of finance?
The Crypto World Before DeFi
On January 3rd 2009, when the first Bitcoin block was mined, the primary idea was to create a digital currency that would do away with the centralized establishment, without any authority or central minting body and that would work on a peer to peer basis.
Then there was Ethereum…
In 2014, Ethereum was launched to make more transaction per second, for scalability, and with it came a sort of scripting language that would allow adding instructions on the blockchain quickly. These instructions can be regarded as encoded rules or stored procedures that trigger “smart contracts”, another disruptive feature that enables real use-cases.
Besides complex “smart contracts”, the Ethereum protocol allows for creating new cryptocurrencies, the ERC-20 tokens, which have their own definitions and behaviors but are hosted on the Ethereum blockchain and follow a strict technical standard. Almost all of them being open-source, as in DeFi.
DeFi: Finding real world uses
Today, when we talk about Decentralized Finance (DeFI) and the coins associated with it we are actually talking most of the time about ERC-20 tokens or Dapps (Decentralized applications). They implement their own sets of rules or “smart contracts” in order to fulfil specific needs.
What are the needs of a good cryptocurrency ? Well it can be lending or borrowing money, defining interest rates, tracking goods or property, managing IDs, insuring contracts or goods, so on and so on…
These contracts are hard coded and cannot be easily tempered with by human actions, they are their own law. Yet there is still the possibility of bugs and hacks and there surely will be some at one time or another…
What this DeFI ecosystem is purporting to do is to give individuals the possibility to handle their own financial life without having to call the services of Law Firms, central Banks, Financial institutions, Insurance companies or other intermediaries. This process cuts costs and time as well as getting independence towards the established economical system.
Obviously there are still many hurdles to deal with and we are at the very beginning of this financial revolution. The money involved right now in these different projects, while seemingly important in size (around $2 billion stored in the DeFI sphere as of the end of August 2020) is just a fraction of the trillions of fiat money that circulate in the traditional financial world, even small to the whole crypto market-cap.
Many traditional companies (large banks, service providers, even governments) are working hard to reduce the gap between their own secular ways and the new dynamics introduced by cryptocurrencies.
They are actively involved in research to come up with their own digital trustless solutions. Let us just hope the likes of Facebook, Google, UBS, JP Morgan and consorts won’t come to whistle the end of the game…
Decentralized Finance has spurred projects in quite a number of areas and here are a few examples of what DeFI can help simplify:
- Wealth management: through wallets such as Metamask, you are in control of your crypto and can easily interface with DeFI protocols in order to buy, sell, lend or borrow assets.
- Lending and Borrowing: DeFI allows individuals or companies to borrow money on the market without intermediaries while crypto owners who have elected a lending platform can earn interests on the loans they participate in. Compound, Dharma, MakerDAO are such protocols operating under decentralized autonomous organisations or DAOs and giving a glimpse of what it could be in the future to buy a house or any other property without a loan from a traditional bank.
- Derivatives: Options, Futures, Swaps and Forwards are the types of derivatives handled by DeFI protocols which can represent real-world assets like fiat currencies, bonds, commodities or crypto currencies.
- Insurance: Nexus Mutual for instance through NXM offers a smart contract protection against malicious code or misuse of assets through a risk-sharing pool.
- Decentralized exchanges or DEXs: the most popular of them and certainly best known is Uniswap. These exchanges operate without any central body or administration and most importantly do not require you to deposit your crypto. You constantly remain the sole owner and all transactions are done from and to your wallet. You only pay exchange fees which, it must be said, can be rather hefty at times.
- Gaming, identity, payments, DeFI and its “lego-money” structure allow for many applications that we’re going to probably use in the near future.
DeFi and Trading?
So far, as profitable traders, we have been dealing with crypto essentially as a mean to gain more Bitcoin. BTC remains the boss to transact in the crypto market and dictates the rise and fall of the altcoins.
Most of the time we buy altcoins against BTC in the hope they will help us get a bit more of that digital gold that is BTC without caring what that particular coin purposes to do (does anyone remember what SC or XVG are?). What we care about is that at one time the chart tells us this coin might help us profit by a few satoshis and thus get a bigger BTC bag.
The new coins appearing on the market today might meet, for most of them, the same fate than their predecessors with their actual use being forgotten over time and become new tools to add to our bitcoin balances.
Yet, some of them are genuine projects and might actually find their own ways, even getting free from BTC dominance. It is important to notice that some coins like DOT have recently been living their life regardless of bitcoin movements and after a relatively short inception time on UNISWAP have been quickly listed on most major exchanges. Have a look at DOT, YFI, DAI, SRM, OM, NXM and get ready for UMA, STRONG and a few others like KEN…
A Bright Future For DeFi?
So, are crypto and DeFI ready to take over the world and replace traditional financial instruments?
It’s certainly too soon to tell and we yet have to see what will happen in the coming weeks, months even years, but as traders we need to stay on the edge of innovation and hopefully be early investors in technologies which might well shape the future of our daily lives.
After all, even though we might be in here for the tech we all hope to access that “everybody gets a girlfriend” magic zone! And some of the new DeFI coins might well help us get there quicker than we dared to hope for.
For the more cautious investors, staking coins might be the way to go with some of them offering interest rates far beyond those that traditional banks are now able to give.
Let us not forget the current COVID-19 pandemic which has slowed down the global economy and is changing the way people interact. Are you more likely to go to the bank to meet a financial advisor who will offer you a mere 0.2% interest rate per annum or to connect to your favourite exchange and stake that new shiny coin you found for a whopping 9%?
DeFI apps are trending right now in a world that is almost ready to welcome them as social interactions are slowly changing and cryptocurrencies are looking more and more as viable means of doing business.
We might as well take our share of the possible next revolution and capitalize on it!
If you want to extend your knowledge about DeFI projects and coins, here are a few links you might find interesting:
Bitcoin can handle around 4.6 transactions per second while Ethereum handles around 15 TPS and your Visa card network about 1700 TPS.. Ethereum 2.0 is targeting 100K TPS!
USDT, LINK, BNB, EOS, ZIL, VET, etc… are all ERC-20 tokens
- Keysian networks, not a doll buying coin!!! 😉