For a couple years now, I discussed the idea of decentralized finance becoming a huge part of the tokenization process. When we consider the fact that is more than a quadrillion dollars out there in assets, we can see how this could become an enormous market. All over the world, assets are traded, bought, and sold. For the most part, this is done in a centralized manner.
Over the last few years, the opportunity to move trillions of dollars in assets over to the decentralized world has grown. We see the ability to tokenize assets becoming easier as time passes. There is one major stumbling block that will still have to be dealt with.
Before getting into that, we see a craze taking place at the moment. All throughout the crypto world, we see DeFi as the main topic. Prices of assets that are put into this arena are mooning. Who has not see the YFI move? The Yearn.finance token is now worth $33,000 after being at $700 a few months ago. This is life changing money.
A new term was introduced to the community, yield farming. What started out as a way to put some BTC or ETH to work and earn a return has evolved into an outright whore's race. The main focus is to top whatever the other platforms are offering. Instead of a solid 6% or 8% return, we see offers of 50%, 75%, and 100%. This is something that even caused Vitalik Buterin to comment upon. His view is this is simply "unsustainable".
That said, while all this is taking place, the developers are hard at work. That is the thing about coders, they keep coding. So while there might be some "irrational exuberance" right now in the market, the DeFi platforms are improving. We are seeing innovation that will help to pull us forward even after the craze ends.
Thus, DeFi is for real. The craze is just over-hyping and people finding a way to make large sums of money very quickly. However, the concepts are sound and will progress into something more.
Yield farming aside, there is the potential to lay the foundation for much greater activity. While the billions in cryptocurrency being staked adds up, this pales in comparison to real world assets. Thus far, they are being omitted from the entire industry.
Tokenization provides many benefits over the existing system for many markets. Real estate is one that many feel is primed for this change. For the most part, it is a non-liquid industry. Therefore, we have roughly $225 trillion globally locked up. This means it is not only slow to move, but also expensive. Anyone who ever bought or sold a house knows how much of a pain all this is.
Here is where tokenization offers an enormous benefit. Suddenly, properties would be liquid. They could be bought or sold quickly, for only a few cents on the dollar. Platforms are already being set up online to bring buyers and sellers together. Why not take the extra step and make the entire process digital? This really applies to investment properties.
There is one major stumbling block. Presently, government regulations stands in the way of this industry moving forward in this manner. In short, the view is these are securities, thus are only able to be created and sold by approved entities. This means back to the centralization game. While many innovators have wanted to approach this idea, without the license to be a securities dealer, they are running afoul of the law.
Which is precisely why the long-term view of DeFi is so optimistic. It is here that we come upon the ideal solution for this challenge. A fully decentralized platform cannot be shut down and is outside the bounds of regulation. Tokens can be created and traded on DEX all over the world, outside the heavy hand of regulators. Of course, the general public is going to be leery of this type of transaction, at least to start. Nevertheless, it is best to remember that people were scared to put their credit card number online too at one point.
The development that is taking place offers the potential to build platforms of this nature. By looking to decentralize the tokenization process for real world assets, DeFi will move into another leg of its existence. Many are amazed at the billions being staked yet this will be a drop in the bucket when we see assets such as real estate, art, and other owned property being tokenized.
Our present DeFi craze is masking the potential of what truly can be done with this technology. It is similar to the ICO mania we saw a couple years ago. The concept of using tokens to raise money is a sound one. However, since there was so much fraud, scams, and outright bad ideas, this means that the government was alerted. This caused action that we still see the fallout from.
We can expect the same thing here. At some point, the regulators will step in and start to halt some of this excess. The result will likely be the shutdown of the entire process for a while. Nevertheless, as more development takes place, it will come back at some point. Today, fundraising is taking on a bit different form. As decentralized platforms expand, we an expect this to come roaring back.
Imagine for a second an exchange like Uniswap offering a great deal more than just speculative cryptocurrency tokens. Think about that platform expanded, or another one tied to it, where investment properties were listed. Using the smart contract capability, we would see all the terms spelled out for token holders. People from all over the world could buy fractional units in these properties. They would be bought and sold as individuals saw fit, 24/7.
DeFi offers something that no centralized entity can. A system like this is going to succeed because it eliminates all counterparty risk. This is a big problem in many sections of the world. It is also the reason why banks and other financial entities exist. They act as a trusted go-between when two parties come together. We see this with the basic credit card. A merchant does not know the person who walks into a store, thus has not trust. However, Visa is a party that the merchant trusts, thus he or she is willing to pay a percent or two for that verification.
With DeFi, we will see the fees reduced (potentially eliminated depending upon the platform). There is simply no need to pay an entity to serve in that capacity. All the trust is generated by the platform which is coded to simply perform the transaction based upon what each party brings to the table. Thus, when using a smart contract, the terms are coded in and that is what the software follows.
It is easy to get caught up in the mania and overlook the foundation that is being laid. Most blockchains are having to take a hard look at getting involved in DeFI in some manner. It is simply an offering that will have to exist. Thus, either a platform develops the capability itself or forms a bridge to a blockchain that does. It is why so many blockchains are now looking to connect to Ethereum since that is the epicenter of where the DeFi action is.
With technological advancement, it is best to look past the hype and news stories while focusing upon what is underneath. DeFi offers amazing benefits to the world. It is still in the development stage meaning a great deal more is required. However, we can see the seeds of something much greater forming.
Simply put, DeFi is here to stay.
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The internet did destroy stock commissions. A trade that in 2000 would have cost $500 in commission is now totally 100% free.
Great point. It is amazing how things change when we look back at them over a couple decades.
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When I first discovered crypto, one use case that was presented to me was to imagine striving to put together something of great value (piece of art, invention, company, house) and being able to directly sell portions of that to stakeholders through the blockchain.
WAX grabbed my attention a couple years ago as a blockchain closer to the general, crypto powered exchange of assets. I sit on a few of those tokens.
I have always wondered when crypto or certain blockchain would get big. Enough to force the hand of governments to really lock them down but I love your insight that the development will keep rolling and eventually overcome that hurdle. I figured that would have happened by now but a slow steady proliferation is much better for long term
Awesome thoughts again my friend.
Development does take time. Things move quicker when things are open sourced as we are seeing with the Uniswap-Sushiswap situation. That said, when enough of a foundation is out there and more people are working on stuff, we see how things start to explode before our eyes.
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Somewhere down the line there will be a great shake out “pets.com”. DeFi has it’s purpose but I’m getting some flashbacks of the late nineties.
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Yeah or webvan.com.
There is no doubt that are some dogs in the DeFi space but we have to sift through them. Projects that have real development behind them will be long term gainers.
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Definitely in the development stage, although I haven't for one look at the potentials of DeFI because it's all new but I have no doubt decentralised funding will make a huge impact. Awesome to read your contents as usual again.
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It only makes sense especially as millions of people around the world are filling their crypto bags each month. As the value of those holdings grow, many of those individuals will be looking for other projects to invest in.
This will offer average individuals the opportunity to own a small stake in art, real estate, or vintage automobiles. As those assets appreciate, if they do, we see the value of the token growing.
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So real, hoping whive gets a piece of it
If people use it and support it, it will.
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Defi is real you cute kitten
DeFi is really cool, but it's like the 2017 shitcoin waterfall. So many DeFi projects will turn out to be scams. So many others will fail due to the fact that they just don't work. A few, very few, will go on to make their participants buckets of money. Oh, and there's probably going to be a huge hack a la the ETH DAO hack of 2016 or whenever it was and thousands of innocent people are going to lose a bundle.
What an amazing content. It is educative and inspirational. It shows that Crypto is the global currency and an encouragement for people to invest in the crypto world. I will definitely try out DeFi.