- Over $650M in Total Locked Value
- DAI reaching it’s $100M debt ceiling
- Lending protocols like Compound and dYdX receiving support from high-profile investors
- Uniswap celebrating it’s one year anniversary with nearly $1M of 24-hour volume and over 20 pools with more than $100k in volume.
While the list could go on and on, the key point here is that DeFi continues to grow by the day. Whether that’s measured in terms of the number of new products being shipped or the aggregate amount of value being transferred, there’s no denying that DeFi has long solidified its importance in the Ethereum ecosystem as a whole.
What’s The Big Deal?
For those readers who aren’t quite sold on the potential of DeFi, we want to use this article to paint a more holistic picture of what this ecosystem enables in the next few years. Whereas we’ve seen many of the top digital assets experience parabolic growth thanks to the speculative support of their core communities, DeFi largely focuses on product development: where growth is measured by more traditional metrics such as daily average users (DAUs) and assets under management (AUM).
As such, it’s important to recognize that DeFi has been crucial in helping us shift our focus away from speculation and more on tangible usage. Whether it’s something as small as leveraging Dharma to enjoy a higher savings rate on your USD or something more complex like margin trading on dYdX, the large majority of these products have strayed away from trying to drive value to a native token and focused far more on the user experience (UX).
Dreaming of a Trustless Future
Now that many products have shipped, let’s take some time to explore a variety of services DeFi *could* unlock. It’s important to note that we may be extrapolating on a few of these but for the most part everything described below has been vocalized as a possibility by the companies we’re describing.
First and foremost, it’s worth recognizing that all of the examples we’re about to discuss are permissionless, meaning that anyone is welcome to participate so long as they have capital to do so. Furthermore, most of these services are trustless, meaning that there is no need to rely on middlemen or the issuing party for these examples to happen. With these notions in mind, let’s look at a real-world example.
DeFi as a Financial Safe Haven
I’m a marginalized individual living in Venezuela. My nation’s currency has been suffering from hyperinflation and although I’d consider myself to be *educated* when it comes to technology, there remains a vast lack of opportunity for me to leverage these skills to their full potential.
I’ve heard about cryptocurrencies and am interested in investing, but am quite scared about the volatility and uncertainty these markets are said to have. Using MakerDAO, I leverage the deed to my home as collateral in order to receive Dai, a stablecoin pegged to $1. The tokenized version of this deed remains in a digital vault, while the Dai is free to use. In order to ensure that I am protected, I head over to Nexus Mutual and take out an insurance cover on the Maker Tokenized Asset Portfolio smart contract. This protects me in the event that there is a hack or security breach.
Next, I take a portion of that Dai and lock it using Oasis, granting me an annualized savings rate thanks to the Dai Savings Rate. Seeing as I want to hedge my risk to Maker, I then use InstaDapp to loan a portion of that Dai on Compound Finance, an alternative lending solution that guarantees me interest for lending my currency.
Now that I’ve secured both a stable currency and interest on that currency, I want to use a small portion (say 5-10%) to experiment. First, I head over to Uniswap and quickly swap my newly minted Dai for ether, all while retaining custody of all my assets. I take a portion of these ether and purchase a TokenSet, or a highly sophisticated trading strategy in the form of an ERC20 token. Next, I gain exposure to the traditional stock market buy purchasing a tokenized derivative of Apple stock using Synthetix. Finally, I use Ren Project to swap Dai to Tezos, leveraging Staked or Coinbase to easily stake my asset and earn additional interest.
In less than an hour, I’ve now not only secured a stable currency with guaranteed interest, but also gained exposure to the upside of some of the most notable digital assets, paired with exposure to a FAANG stock, all using blockchain technology. Best of all, the large majority of these services were accessed using a universal login such as MetaMask, which can be changed to a human-readable address such as argentina.hasnomoney.eth using Ethereum Name Service.
When the internet first came into existence, it was pretty unclear how it optimized legacy services that had been offered for decades prior. Today, we can think of DeFi and the larger blockchain ecosystem in the same way. While these services might not seem all that novel, it’s important to recognize that I could do them all entirely at my own convenience, at anytime, for a fraction of the cost. Better yet, there were no restrictions due to my geographic location or income bracket and this is just the tip of the iceberg.
Moving forward, we can expect web 3 businesses to offer early adopters upside to the future growth of their company in the form of tokenized claims over asset reserves. Stated another way, anyone in the world now has the opportunity to enjoy the same benefits long kept exclusive to angel investors and venture capitalists. Taking this a step further, we can expect the notion of annual subscriptions to become far more liquid. In a world where holding a specific amount of any company’s native currency (think Apple or Amazon gift cards) can unlock Prime benefits, it’s exciting to think that your subscription costs are no longer forever lost.
With all of these ideas tied together, it becomes apparent why so many people are excited about DeFi as one of the first major stepping stones to finding blockchain’s killer application. As it stands today, the ecosystem is primarily being built on the Ethereum protocol, a leading platform representing a fraction of the larger blockchain ecosystem.
In the next few years, it’s likely that new protocols will develop niche audience with competitive advantages for specific use-cases. As such, we believe that DeFi’s focus on product development paves a solid foundation for the future growth of blockchain technology similar to what we saw with SaaS companies in the past decade.
We’re excited to be testing these products so early in their life cycle and are constantly searching for the use-cases which allow our society to further benefit from the rapid growth of valuable services and information on an instantaneous basis. If you or your project feel like you fit into this category, give us a shout! We’d love to hear more about it and share it with more readers like yourself.
Cooper is focused on building compelling blockchain products. He currently works as the managing director at Fitzner Blockchain Consulting and is a contributor to DAOs like MetaCartel and Moloch. He is an active member of the Ethereum community and has a strong interest in for-profit businesses such as The Block Crypto and Messari.