The DeFi Revolution & What it Means for You.
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DeFi Revolution“Decentralised finance (DeFi) is booming, with the total value locked — the overall value of assets deposited in transactions — having risen from $700 million in December 2019 to over $200 billion at the beginning of 2022, equivalent to Greece’s 2017 GDP.” -Philip Blows, CEO of AQRU
Without a doubt, DeFi is hot right now. The space is experiencing explosive growth and doesn’t show any signs of slowing down anytime soon. It’ll be one of the biggest trends over the next decade yet many people still aren’t exactly sure what it is. As with any new innovation, there is an education gap that needs to be bridged for the general populace. At Velvet.Capital, we are passionate about helping to bridge that gap and are firm believers in the future of DeFi. for as much as it has grown this is just the very beginning. The potential is through the roof, considering the wide number of potential use cases.
A good way to start thinking about decentralized finance is that it is peer 2 peer finance that is enabled by the blockchain. It will be the mechanism that will bring web3 banking with cryptocurrencies to the masses. It’s a rethinking of our current legacy financial system. Defi is a system where there are no middlemen, gatekeepers, or controlling governments but rather code that acts as law. It is totally permissionless (no one can stop or seize your transactions),programmable (fully automated by smart contracts), transparent (traceable and trackable to a public ledger), immutable (unchangeable), and non-custodial (you never give up custody of your assets).
You never give up custody of your assets so you can reap more of the benefits. Anything you could do at a bank or brokerage you’ll be able to do through a smart contract — often to a greater advantage to you as an individual (more on that later). Everything is clearly traceable through a digital blockchain that ensures all the information is totally public — one ledger accessible to all. The use cases will only continue to grow.
Before we get too far in on this, it’s important to highlight the deficits of our current financial system, to fully appreciate the value proposition of DeFi.
Legacy Financial SystemTraditional finance is basically everything we know and use today. Lots of intermediaries and 3rd parties put themselves between you and whoever is on the receiving end of your desired transaction. Banks, credit card companies, the Venmo’s & PayPal’s of the world, brokerages, the government — you get the idea. Everyone is trying to get a piece of the action and there is so much red tape unnecessarily boggling down the efficiency of the process.
This highly centralized system is certainly the most familiar but that does not mean it is the best. Over the last several decades the necessary trust and transparency that underpins a system of this kind has been eroded away. A growing number of people feel institutions & governments have failed to live up to their end of the bargain & these people seem to feel like they’ve been consistently given the short end of the stick. The short end of the stick comes in terms of increased higher costs with less and less to show for it. Overdraft fees, non-existent savings interest rates as inflation creeps to multi-decade highs, exorbitant fees for international banking transfers, early withdrawal fees, the list goes on.
The data would seem to back that up as global inequality has skyrocketed while trust for traditional institutions and governments has plummeted as a result. The top 10% held 76% of the world's wealth and captured 52% of the income in 2021. All while the bottom 50% held 2% of wealth and captured 8.5 % of earnings. Countless scandals (including the notorious GameStop Saga), speculation-driven recessions and failure by the government to meaningfully ensure a fair shake at it for the average person has left an enormous opportunity for a fair and transparent alternative to fill the gap. This can be highlighted with the Edelman Dimensions of Trust Chart below which tracks public trust based on two distinct attributes: competence (delivering on promises) and ethical behavior (doing the right thing and working to improve society).
DeFi: A Solution EmergesThis is where DeFi comes in. In a way, it is the reimagination of our deeply flawed system. It is a way for average people to pull back some of that power, control, and fairness that has been taken from them over time. DeFi not only removes the unnecessary intermediaries that get a cut or custody of your hard-earned assets but it also ensures an underlying fairness and transparency. The whole process is streamlined and highly efficient.
The system cannot be gamed because the code is the law. That code is in the form of an immutable smart contract. These smart contracts govern the world of decentralized finance. The code has no feelings, special interests, ulterior motives, or skin in the game. This drives a fundamental and underlying fairness.
These smart contracts are highly programmable so the use cases will only grow from here. Reflexively, this means that the advantages and value proposition of using DeFi will only grow over time. In theory, everything you do now within our current legacy financial system will be able to be done on chain — but better.
Notable Advantages of DeFi:
- Eliminates fees that banks, brokerages and other financial institutions charge to users
- Speedier and more efficient transactions
- Retain full custody of your assets
- Open-source protocols so that anyone can build on the platform
- Opportunity for additional yield on investments
- Transparent and auditable
- No one can change the rules
- Will only improve from here
Potential Risks to ConsiderAs with anything in life, there is risk. You should always do your due diligence and only work with trusted and established actors.
- Rug Pulls
- i.e. Bad actors and scam projects
- Users generally assume all risk
- Smart Contract Issues
- i.e. Hackers finding vulnerabilities in the code
- Collateral Requirements
- Overcollateralization is generally required due to the volatility and lack of credit scoring
- Regulatory Risks
- i.e. Governmental
Join us on the JourneyDeFi is going to allow people to take back control of their assets and make a more fair future where financial freedom will be more attainable for all. We’re so excited for this transformation and happy to play our part in it. We hope you join us on this journey. We would love to have you join our community.
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