Bitcoin’s value proposition as digital gold is great, and it definitely has utility, but in our opinion, it doesn’t have nearly as much widespread utility as DeFi does. Bitcoin is being recreated on Ethereum through pegs on TBTC and Ren Protocol, implying demand for Bitcoin but utility on DeFi. In the coming years, DeFi will solidify itself as a meaningful narrative, giving cryptocurrency real-life value and use cases.
Ethereum has spurred on a new revolution in the cryptocurrency world. Financial applications like MakerDAO, Compound, and Synthetix are taking the crypto world by storm with widespread utility. One can take a loan or invest in sustainably yielding money markets to earn passive income.
The advent of DeFi has created a new type of crypto investor: the stablecoin maximalist. These people are not interested in investing in volatile tokens. They are more intrigued by the free market rates prevailing in DeFi.
You see, unlike the traditional market, yields are not set by an institution or “panel of experts”. In DeFi, yields are set by how much someone is willing to pay to borrow money as well as the utilization of the pool of funds available for borrowing.
Without getting too technical, the premise of DeFi is creating financial services where those in the market determine rates; not those in control of the market.
DeFi can create real utility for real people. Today, it caters to a niche of enthusiasts who are aiding the development of the base. Tomorrow, it could be the whole world. The question that remains is why do we even need DeFi?
The permissionless nature of Ethereum, or any other adequate public blockchain, means nobody can be stopped from using services. As a result, risk parameters that are set, are set for everyone as a whole – not based on individual risk profiles. The lack of discrimination is a huge point, considering the sheer amount of people that are refused service by financial services companies across the globe.
A person with a low credit score will be refused service by loan companies in the traditional system. DeFi caters to them.
Now, the naysayers will come and say “but DeFi is overcollateralized, so there’s no utility”. A tiny bit of homework reveals that large loans, for things like houses and cars, are also overcollateralized.
What we will admit is that loans backed by future cashflows like educational loans or personal loans cannot take place on a trustless blockchain, because they inherently require trust. Things like flash loans are currently wreaking havoc by giving computer geeks the ability to procure millions of dollars worth of loans with a few lines of code.
There are a lot of things that need to be fixed. And they probably will, in due time. But the fact of the matter is that this has created real-world utility. Things like DAI and Compound are fairly secure and have, for the moment, created immense value for those who aren’t fortunate enough to live in the first world.