DeFi — the Lending Frontier
Pandora’s box has been opened by the invention of Bitcoin and it’s just the beginning. As new and innovative financial structures are made possible by the blockchain, the market is responding quickly. Programmable money is being taken to a whole new level.
DeFi, short for Decentralized Finance, is a financial system that runs on a blockchain. In this new system software code acts as a replacement for banking activities, allowing individuals to manage their assets without human intermediaries.
The ability to trade, lend and borrow your money using an open source protocol while keeping control of your assets is so incredible it’s almost impossible to believe these opportunities are available for anyone with access to the internet. We must understand that legacy banks make most of their money by lending, borrowing and trading amongst each other. According to fractional reserve regulations passed in March 2020, when you deposit $100 into the bank, they are required to keep zero of those dollars in physical cash. Meaning they are now theoretically allowed to lend your $100 indefinitely, effectively making thousands of percent on all deposits without including you, the depositor, in the returns. As of October 2021, the national average interest rate for savings accounts is 0.06%….
In a DeFi system, depositors are able to earn from 2% to 20% APY on their holdings and if done creatively, much more. Depositors are also able to borrow funds without credit checks by posting their own collateral, while earning interest on that collateral. This might sound “too good to be true” but the reality is, traditional banks are already making these types of gains but in an irresponsible and fractionalized manner.
Although bitcoin was the first decentralized finance system built with blockchain technology, to trade bitcoin you must deposit your coins onto a centralized exchange, giving up control of your private keys and eliminating one of the key benefits of blockchain, the ability to self custody your assets. Smart contracts are allowing users to trade, lend and borrow assets without having to give up their private keys.
Run the Numbers
DeFi’s emergence in 2020 has grown the entire crypto industry creating new and innovative protocols which focus on democratizing financial services. The summer of 2021, commonly referred to as “DeFi Summer”, the DeFi ecosystem saw a huge influx of interest in the space. TLV stands for Total Locked Value, meaning, the amount of all digital assets held in DeFi smart contract protocols, this includes cryptocurrencies and stablecoins. In January of 2020, TLV hit $600 million. Today, TLV is at $241 billion. That’s a growth factor of 400x in under two years.
The value that is locked in DeFi protocols is used to provide liquidity for trading, borrowing, minting derivative assets and even insuring digital and real world products. The benefits of locking your cryptocurrencies in these protocols is the ability to earn compounding interest at rates much higher than a bank.
Of the yield generation possibilities that are available on the market today, DeFi is low risk. This is great for those who are looking for scalable and steady strategies to grow their savings. The use of stablecoins in DeFi eliminates the price fluctuation of cryptocurrency investments. This sets up for a perfect storm when it comes to the risk appetite and investment profile for Wall Street institutions.
Although DeFi is a new financial tool and can be complicated to use for those who aren’t computer savvy, it’s track record has given investors the ability to monetize their savings efficiently. DeFi unlocks additional revenue streams, reduces capital controls and allows for the unbanked to participate in banking activities in the most transparent and secure manner.
I will be teaching about Bitcoin and DeFi during President’s Week. Join me, Dr. Ron Paul, Porter Stansberry and other great speakers in Vegas to learn more!