Joel taking over from Lawrence this week. I have been splitting time between Singapore and India over the last few months and I couldn't help but notice the difference in interest rates. Singapore bank deposits in SGD generate around 1.75%. Inflation in India with INR is at around 6.5%. Decentralised finance (DeFi) has begun looking like an alternative, global bank that offers better interest rates with dollar exposure to me with the help of stable tokens. Risky? Yes. But possible. DeFi lending platforms claim to provide up to 8% on an annualised basis. In other words - it allows me to have dollar exposure and beat average interest rates offered by a US bank. Sounds like the best of both worlds doesn't it? Globalisation brought our markets together, but legacy banking infrastructure and strict foreign currency regulations meant our currencies generated different returns. In its essence, DeFi platforms level the playing field. "Belong to a nation where interest rates are 2%? How about lending it and receiving upwards of 8% annually.. Find it too hard to take a loan in your region? We provide instant loans with your tokens as collateral, zero paper work and no background checks" . That is at the crux of most lending platform's sales pitches.
But how effective is this? To begin with, interest rates on DeFi platforms may diminish and flatten out as larger financial bodies enter the space. Startups have begun doing massive raises in debt to loan out USDT or DAI at high interest rates to global audience. Theoretically, these returns will diminish as market competition drives interest rates lower. As a borrower, I will always optimise to pay the lowest interest possible. This is where semi-centralised, token lending could capture substantial market share. The entrance of mainstream finance to DeFi is already here through instruments like USDC (circle's stable token). They seem to have the nature of permissionless tokens, but are fundamentally IoU tokens held by a central player. In addition, discounting the utility over-collateralised loans have for taking leveraged positions, it may not be fair to suggest DeFi can bank the unbanked yet. While DeFi lending does bring the cost of issuance of loans considerably lower, it may not be well to assume that much of the world has an excess of tokens to put up as collateral.
So on one end, there is the risk of declining interest rates as liquidity for loans increase and on the other you have the possibility that over-collateralised loans may not be the final model for DeFi to disrupt finance. Does this mean DeFi, is simply a meme like cryptokitties was for a while? Definitely not. DeFi platforms capture roughly $500 million in volume today, but that figure will grow as the models around DeFi evolve and niche communities become aware of what they provide. For instance, DAI based payroll settlements are being enabled by platforms like Whisp.money and subscription management is being enabled by Groundhog.network. For many in the gig economy, DeFi offers crucial banking services that are not possible due to lack of formal documentation provided by a large corporation. These are very early days.
As self sovereign identity come of age, and autonomous agents(through potentially things like AEAs on Fetch.AI) speak with one another, credit ratings of an individual could be better calculated and loans could be issued on basis of them. Custom loans may be issued on basis of the intelligence agents capture from studying a user's transaction history. I hope for custom discounts on all the books I buy. This could be half as intrusive as traditional finance platforms are, protect user privacy by keeping them in charge and be incrementally faster in issuance. Long story short, I believe, over collateralised lending is the Limewire equivalent of P2P money. Yes, it brings resources together, but it pools risks too. We see some of that risk in action every time DAI slips under a dollar. Or when trading settlements on decentralised exchanges happen with heavy price slippage. We are a few years away from seeing the Spotify equivalent of DeFi come of age, and when it does, it will be a sight to watch. I wonder if we will even call it "decentralised finance" then. It may just be the natural, next evolution for the broader financial landscape to take. Exciting times ahead!.
If you'd like to learn more about the DeFi ecosystem, do read up on the space from our recently released ecosystem map.
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Reading : The Intelligence Trap by David Robson
Listening : Renegades by X Ambassadors
Thinking About : Gig economy platforms in South East Asia.
Using : Nomics and TokenAnalyst
Signing out for the week,
From The Stack
- Fetch.AI released more details about their consensus protocol. A proof of stake implementation with a unpermissioned delegation. - Link
- Enigma Collective released an explainer video on how secret nodes function.Watch it here. The team's July Development update is also out. - Link
- The fifth cohort of IOTA's Ecosystem fund grantees has been announced - Link
- Chainlink is being used to create AI smart contracts by Cortex Labs - Link
- Foam has released the full list of their ecosystem funding greants - Link
- The team from Ocean Protocol will be at Blockchain Week Berlin. Learn how to build on the new data economy at their meetup - Link