Last week, Reddit’s investor Keith Gil, also known as DeepF**kingValue, testified at the House Financial Services Commission. The moment Jill said “I’m not a cat,” the people watching the video immediately noticed who this “cat” was, and somebody might have sprinkled the coffee they were drinking on the keyboard. (Gill’s YouTube ID is “Roaring Kitty”)
It wasn’t just funny jokes. Gil was staring at the screen with a serious expression, talking to the most powerful people in the world. It was a change of attitude toward power. Gil showed loyalty to his team, not to the vested interests. This is happening not only on social media, but also in schools, cultures, startups, and even the financial sector.
Bitcoin (BTC), the representative player of “semi-vested rights,” has repeatedly increased in price and surpassed $1 trillion this week, and meme coins such as DOGE also rose significantly. Much of this price increase is linked to the current changes. As vested interests began to lose their trust and influence, alternatives began to gain more attention.
The change is not only happening with individual cryptocurrency assets. Congressional hearings pointed out that ordinary people are beginning to recognize the structural risks that exist in capital markets. When these changes are combined with recent industry trends, the digital asset sector can grow significantly. That field is decentralized finance and DeFi.
This concept is about more than just a high return on investment. For those who are willing to take on higher risks, there may be more return on investment. This concept is about the birth of a new financial market. They weren’t created by professional investors, but they will pay off in the end. There has been a big leap forward in this move this week.
Under the hood
As the gamestop stock price soared, interest in the financial market was concentrated. Previously, only a few were interested in financial markets. When institutions scapegoat individual investors, people have questions. It was unprecedented that so much attention was given to parliamentary hearings. Many have watched the hearing to find answers and see the beginning of change.
Meanwhile, interest in DeFi and application development is also exploding.
DeFi means an automatic program that performs loans and transactions in a decentralized P2P method. Bloomberg reported on Jan. 28 that the untraded GameStop stock trade amounted to about $359 million. This cannot happen with automated cryptocurrency trading. All transactions are handled with equal priority, no one has the authority to change the rules, and no brokers prioritize certain orders.
DeFi started from an experiment that was conducted in the Ethereum ecosystem several years ago. This experiment distributed an open source’smart contract’ to handle transactions, interest payments, and collateral swaps. Last year,’interest farming’ became very popular. Interest farming refers to the act of moving from one platform to another in order to obtain the highest profits. There were times when the rate of return hit three digits. At that time, interest rates in traditional financial sectors were close to zero.
However, the risk was as high as the profit. Many platforms were developed with hastily written code, and countless bugs and losses occurred, and there were many cases where there was no way to rebuild. But when innovation begins, mistakes are made. Besides, the results were amazing.
It was only a matter of time before institutions began to pay attention due to the high rate of return. Genesis Trading (DCG’s subsidiary, CoinDesk’s controlling company) said in its Q3 2020 report that the growth of lending products was due to institutions seeking high returns.
Several months have passed since then, and the ecosystem is quite different from then.
The economic value of the DeFi platform has nearly tripled from the beginning of the year to the present, reaching $43.9 billion at the time of article writing. DeFi platforms are often operated through tokens that provide access and governance rights.
The total value of the top 100 tokens based on market capitalization is $83 trillion, with a 24-hour transaction value exceeding $16 trillion. The DeFi Pulse Index, which tracks the top 10 tokens by market capitalization, grew 260% per year.
In addition, Ethereum, the basis of most DeFi applications, has begun the transition to Ethereum 2.0, which is more scalable and uses less energy. This will solve the problem of high fees that threaten Ethereum’s transaction volume. It will also provide a viable platform for DeFi applications and open up possibilities for integration with the traditional financial industry.
Institutional entry is increasing. Coinbase Custody has been providing DeFi token trading and consignment services to institutional clients, and this year also registered four new DeFi tokens. BitGo is enabling the conversion of Bitcoin to DeFi-friendly tokens.
Trustology, a digital asset consignee, is helping institutional clients validate DeFi projects. Until now, there was no way to make a profit other than purchasing individual tokens. But here too, changes are happening.
This week, cryptocurrency fund management company Bitwise launched a DeFi Fund that tracks the weight of multiple tokens. And it is possible that some trust funds listed in the US will be released soon.
Over the past few weeks, the industry’s largest fund management company, Grayscale Investments (owned by DCG, the parent of CoinDesk), has provided yield optimization services provider Yearn Finance, Money Market Aave, and Data Oracle Chainlink. They applied for permission for a token-based investment trust for the same DeFi protocol. (Applying for permission does not mean that it will be released, but there is a possibility that it will be released.)
New world
DeFi assets’ profits were high until this year, but the risks are also high. There is also the possibility of a large or small technical problem occurring or being hacked. Several such cases were reported this month as well.
There are also regulatory risks. In December 2020, the U.S. Treasury Department’s Financial Crime Enforcement Agency (Finsen, FinCEN) proposed that exchanges collect the identity of cryptocurrency recipients, followed by controversy. This will hinder DeFi innovation and make some features obsolete.
There is also liquidity risk. Even small institutional orders can distort the market and can be difficult to sell when needed. Moreover, the high volatility of DeFi assets could lead to a huge bear market.
However, given the public support to investigate the structural inefficiencies and weaknesses of traditional capital markets, and the increasing defii activity and innovation, it is likely that more people will be interested in the future.
That would be good news for those who are shaping the capital markets of the future and those investing in these projects. This month, we introduced three venture funds targeting DeFi startups.
Whether it is token investment or venture capital, liquidity and legality will be strengthened as more institutional money goes into the DeFi ecosystem. Agency support will provide regulatory tolerance and help to gradually adapt the current market infrastructure.
Smart investors will understand the risks involved. But massive innovation rewards the brave. And the current market infrastructure is being prepared to help.
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