Name: Inside 'DeFi': Banking without banks
Uploaded: 2021-07-28
Duration: 10 min 21 s
Description: Decentralized finance builds on crypto's dream of a future where banking doesn't depend on intermediaries.

Decentralized finance builds on crypto's dream of a future where banking doesn't depend on intermediaries.

Inside 'DeFi': Banking without banks

Fortune_Crypto

defy is short for decentralized finance. Banking without banks decentralized finance represents the most important new technological innovation for finance, probably more important than the Internet instead of traditional finance, which is administered with spreadsheets, databases, contract and lots of people defy is generally autonomous computer programs that are running financial products and markets. So instead of there being companies involved, you just have software operating out there on the Blockchain, taking care of all of these transactions that you might associate with a financial institution. We're used to relying on banks, Brokerage houses and other financial services firms for access to exchanges to lending to borrowing and other services. And when you think about the D5 protocols that are being developed, it removes that intermediary, it removes that central party that we have to go to today to access those services In a lot of ways. The things you do today, whether it's earning interest or sending money to a friend, you're going to be able to do through decentralized protocols instead of businesses that you have to trust and that you don't understand, it's going to be how and where all finance is conducted in the next 10 years. In the early days of the crypto sort of revolution that's taken place. You had Bitcoin, It was the earliest the O. G. Cryptocurrency out there. The next big shift that happened was you had ethereum. Now, ethereum was trying to do everything that Bitcoin wasn't doing. Whereas Bitcoin was solely focused on finance and sending and receiving payments. Ethereum was instead trying to do all sorts of things, create basically a world computer system that you can run apps on most of defiance. Built on top of ethereum, you basically have all these projects that are now creating what are sort of financial primitives. People like to call them money legos, they're sort of the basic building blocks that you would build financial institution from things like lending, borrowing credit savings. All these sorts of functions that you might associate with a bank are now being taken care of by defi. And by these software projects that are built on ethereum compound is an autonomous interest rate market for cryptocurrencies compound allows you to earn interest or borrow crypto assets by using the compound protocol on the ethereum Blockchain. We're accessing compound through exchanges, Custodians and other applications and products that have incorporated compound interest rates. It's composed of many different smart contracts. A smart contract is essentially a computer program that's deployed onto a blocking today compound supports approximately 12 assets that you can earn interest on and tomorrow. Across these 12 assets, there's $13 billion worth supply to the protocol earning interest today, douse stands for decentralized autonomous organization, basically means a self driving company. Instead of having a typical setup where you have an incorporated legal entity and a board of directors and managers and all this hierarchy. Instead of having that, it's flat, it's over the internet. Anybody who owns a token has a say in the project. The tokens in this case are similar to stocks in that they give you some level of governance over it. And those people are incentivized to have that project performed better to succeed to beat challengers and to be the best that it can be because its value is tied to a particular token. So people who hold the compound token comp As it's called. They are incentivized to make compound better. It's an incredibly efficient system and this is actually I think demonstrative of the value and power of smart contracts and decentralized finance. Today, the compound protocol has $13 billion dollars of assets earning interest in being borrowed. And the entire protocol runs autonomously. So on a given day there's no employees, there's no head count, there's no operations, there's no labor. It has 100% gross margins and no overhead whatsoever. The team that built compound compound labs is only 16 people and the community around the protocol is able to increase and add functionality to the protocol. A lot of the governance takes place on forums and chat rooms and message boards and it's a way for everybody to come together to discuss and debate ideas and improvements to the protocol. But In aggregate there's almost no official headcount working in the protocol and it supports $13 billion. The way that people collaborate online is typically through WhatsApp instagram. DM in people you might be hanging out on Reddit, you might be hanging out on discord now picture having that sort of group chat arena, but tying a bank account to it and setting some rules in place to govern what people are allowed to do with that bank account. That's basically a doubt. A lot of far out thinkers think that this is actually what the form of a company will look like natively online in the future. In Wyoming in 2021, the bill of this legislative session was a bill creating a new type of limited liability company called a dow LLC. A decentralized autonomous organization. LLC. It's a bit of a misnomer and the reason is a truly decentralized autonomous organization has no human beings associated with it or if it does, there's no one in control, whereas with an L. L. C. There has to be somebody who is what's called a control person, somebody who is organizing the entity and hiring what's called a registered agent to receive lawsuit documentation if the entity has ever sued. So there has to be a person involved doing those things. So what's the secret sauce? The secret sauce is the dow LLC type is an LLC that doesn't require the operating agreement to be in paper form. It can be in the form of code in the event. There are disputes, there are governance mechanisms in the code, but also the judges, To the extent that a dispute reaches a court, the judges will be looking to the code, not to the written legal agreement to govern the nature of the agreement between the members of the doubt. It is a breakthrough in terms of how these legal entities operate. There's a lot of interest coming from institutions on Wall Street to learn what defy is and how it works. I speak to global banks all the time about how defy is going to transform finance. I think everyone's just at the beginning of learning and understanding what defies capable of in a lot of ways. It's like the Internet in 1994, everybody can feel that it's going to be important, it's going to completely transform finance, But we're still not sure exactly where and how it's going to fit in. Many investors are thinking about D5 because they're reading about it every day in popular press and wondering how they get exposure to it. Great scale, recently launched the Great Scale D5 Fund, we decided to launch a diversified funds such that investors could make a single investment, but in doing so gain exposure to a wide array of digital asset protocols within the defi sector. One way that the investment community looks at defi is based on a measurement called total value locked. Today, there's over $50 billion dollars of total value locked within the defi ecosystem. And we look at that as a measure of how much capital, how many assets are built into defy protocols and are being deployed into those protocols for the services that they provide. This is also an important measurement, not only for the overall health of the defi ecosystem, but something that informs some of the decisions that are made around the grayscale defy fund, ensuring that investors are always exposed. The D five protocols with the greatest value and the greatest adoption and usage within the fund itself. At least right now, a lot of D five projects are offering high yields to consumers. These are yields that are in some cases 57% sometimes upwards of that. Of course there is a ton more risk involved. A lot of new protocols, even when they're audited might contain technical flaws and due to the irreversible nature of cryptocurrencies, those issues lead to the permanent loss of funds. So defied developers have to be extremely sensitive to the risks and the responsibilities of building a new financial protocol. It's unclear how regulators are going to deal with decentralized finance. It seems to have been taking a lot of people by surprise. There is so much innovation, things are happening so quickly and government can't quite keep up. There are scams, there is fraud, there are what people in the community call rug polls where all of a sudden a team just sort of up in exits with your money. In the crypto world. It's not uncommon for people to go by pseudonymous sort of aliases. Um, online avatars, governments theme is very important to keep track of where money is being sent and who is sending money to who. A lot of people believe that there's a parallel economy between traditional financial markets and define, and that might appear to be the case today. But increasingly, I think the lines between the two are going to blend and financial markets and defy are going to become the same thing. They're just finance and whether you're accessing those markets on a Blockchain or you're accessing those markets through a bank, they're still going to be the same markets. And I think over time, interest rates and exchange rates and value are gonna look exactly the same, whether it's defy or offline finance. I don't know what time frame this is all going to take place over as the sci fi writer William Gibson once wrote, The Future is already here. It's just not evenly distributed. The future is here. All these defy projects are popping off, There is a lot of excitement and enthusiasm in them, uh, and there's this whole weird, wacky, wonderful economy sprouting up around it, whether or not finance needs to be decentralized or needs to be disintermediation. The fact remains that defy presents such utility and such advantages that it's hard to see a future where it doesn't happen.