Decentralized finance is changing the world of lending, borrowing, swapping assets, investing, insurance, and more. This is all happening in a trustless fashion via smart contracts, primarily on the Ethereum blockchain. When I realized this, perhaps a bit late, in January of 2021; I became borderline obsessed. For the first time ever, regular people can act as their own banks, lending out money, swapping assets directly with counterparties, providing or purchasing insurance coverage and other derivatives. That’s only the beginning. Art markets are emerging, corporate governance is happening on chain, real estate and auto markets are likely soon to follow. This is the internet in 1997. Fortunes are being made and destroyed daily in a wild west where emergent developments outpace the understanding of anybody without an ear to the ground 24/7.
Bitcoin is just an asset store, but DeFi has the potential to eat most of traditional centralized finance and insurance. What is stopping it, for now, as the title of this article belies, is network congestion caused by limiting architecture and frontrunning. Those problems are being solved, and are the only thing which, in my opinion, put a hamper on the parabolic growth of DeFi between August of 2020 and February of 2021.
The Characters of Decentralized Finance
DeFi on Ethereum is composed of miners, searchers, builders, users and speculators. Miners validate the transactions and blocks which comprise the blockchain. Searchers act like DevOps for DeFi protocols providing arbitrage to automated market makers, liquidations to lending and borrowing protocols, as well as price oracle updates. Builders create the protocols, often riffing on other protocols and using them as building blocks for novel financial instruments. Users use protocols for many purposes outlined above. Speculators buy and hold various assets to speculate on future value.
I approached DeFi, at first, as a user. I was intrigued by the idea of lending stablecoins out for APYs one thousand times greater than those offered by centralized finance institutions. What are stablecoins you ask? Stablecoins are crypto assets designed to have a stable value, sometimes with a hard or soft peg to a fiat currency, or physical commodity like gold. Then I became interesting in speculating on governance tokens. I acquired art on chain, bought insurance for the Compound protocol where I was lending out Dai, a soft pegged USD stablecoin, for interest. I ran some 465 transactions over the course of a few months, with gas fees totalling enough to buy a decent used car. What I figured out, primarily, is that DeFi is going places, and that users, builders, searchers and miners are creating a whole new ecosystem that is definitely worth getting involved with. Also, that price speculation and swinging in and out of crypto assets is for the birds.
Learning about DeFi
The best way to learn about DeFi is to join the community Discord chats, ask questions. Get a hardware wallet, learn how to use it. Setup Metamask, play around on a test network, so you don’t spend a used car in gas. This trustless world of DeFi is just getting started, and it’s a playground for developers. Builders and searchers are in demand, and the opportunity there for the technically inclined is, I believe, leviathan.
My Favorite Ethereum DeFi Protocols
Uniswap, Compound, Nexus Mutual, Chainlink, The Graph; these are the projects which intrigue me most at present. Layer 2, the solution to the expense holding back the growth of DeFi, is expanding. Layer 2 with rapid and inexpensive connectivity between L2 protocols and better fiat on and off ramps will take DeFi mainstream in the next 2 years. Self custodial debit cards like Monolith will almost entirely obviate the need for bank accounts once combined with fiat payment systems like Venmo and Zelle.
What Are We Waiting For?
What are you going to build? Why aren’t you earning 35% on your USD pegged savings? These are the questions which become immediately apparent when you start to dig into DeFi. For now, the answer might be transaction fees, but it won’t be forever.