Recently the price of Ether has gone as high as $410 from the lows of below $100 a couple of months back. The community, have been HODL-ing (“Hold On for Dear Life) Ether.
I am one of these community believers. You can see this from my eToro account @Fundmanagerzech that I bought at $130+. We do this while preaching in the promise of Decentralized Finance.
Decentralized Finance, is where finance where most of the workflows is code. This removes the need for central intervention.
There are pros and cons to this approach.
Initial Coin Offerings (ICOs) is a simple example, this was a form of fundraising and also capital markets. The market of seed investing was inaccessible to most. The regular investor not having access to deal pipelines or know-how of contracts.
The ICO solved this by decentralizing the process. From smart contracts supplementing certain legal clauses (like hardcap a.k.a as max funding size) to fund collection.
This approach was fraught with scams and poor governance of companies.
Some companies disappearing without a trace. Till today, we see the saga that is Onecoin, the most infamous Ponzi in Crypto today, unwind. The legal requirements of ICO has increased. This difficulty see the number of ICOs, grind to a halt.
Defi is seeing an era where there is little governance on the practices.
An old school example: Bisq v.s. Centralized alternatives
Defi exchanges have been gaining traction, but they have been around. The Bisq.network for example has been around since April 2016. From their FAQ it seems that they have been operating at a profit since their inception.
The decentralization solves some issues. Such as the famous A/B book practiced by some brokers. But since it is completely decentralized so there are less concerns about it.
For the non-crypto initiated, this platform can be difficult to use. It is also slow and often if you don’t have trade size and liquidity is low.
And because it is decentralized, there is less customer creature comforts, such as customer support, and even things we take for granted like compliance (are you selling to a criminal?). According to news.bitcoin.com, Traders have been using Bisq and Revolut to avoid KYC.
Centralized exchanges provide a much better ease of use. With platforms that are fast to use, easy on the eyes and well documented APIs. Trading has less issues with a good pool of liquidity and market makers to provide lower spreads.
Coinbase, Binance, Bitstamp and Huobi are a few great examples of centralized exchanges.
New school example: Crypto lending (Aave & Compound) vs. Shorting
Aave and Compound are Crypto defi lending platforms. Here, by collateralizing your assets you can then borrow another asset.
Why would you do this? If you believe one asset is likely to rise more than another asset.
In the traditional market this is borrowing stock and selling it (short sell). You would then buy it back later and return the stock. This requires a middleman to find stockholders who want to lend their assets. This is of course this is a costly thing.
Not only do you have to pay interest to the lender of the stock, but also the commission to the middleman for brokering the deal.
Warren Buffet, the world-famous investor, has actually made a large amount from selling short put options.
With Defi, you can bring buyers and sellers together without middleman. This of course can be coded because of the use of crypto assets that follow the Ethereum protocol. Aave and compound do this process well.
Does Defi have a place in the future?
The promise of Defi is there is since less human intervention, less costs. Instead code replaces the otherwise manual work.
There is a time and place for both approaches, centralized and decentralized.
I do believe Defi is in the future, else I would not have bought Ether during the drop. But the future of Defi is in managing the risks associated with them. This is impossible without first trying or veterans advising on how to defray the risks
But it would be interesting to see how the community takes advantage of these types of products. I would caution those who want to try Defi there are the risks associated with the approach. So be careful with it.
Manage your risks, or wait till the infrastructure is more built with things like identity or credit ratings.
Overall, I am excited for the future of Defi.