Why DeFi is Here to Stay

If you’re reading this, you’ve probably heard about DeFi. And you might be familiar with some popular projects that defined the 2020 DeFi boom. You could be an enthusiast, detractor, or uninterested spectator. Regardless, I’m writing this piece to tell you one thing — DeFi is here to stay.

Understanding DeFi

DeFi is short for decentralized finance — the decentralization of finance. Let’s define both terms: finance and decentralization.

• Finance

“The management of large amounts of money, especially by governments or large companies” — Oxford Languages.

Simple so far, right? Basically, we consider anything where an intermediary manages money for others an activity of finance. This includes banking, investing, lending/borrowing, and everything in between.

Now, let’s define decentralization:

• Decentralization

“The dispersion or distribution of functions and powers” — Merriam Webster.

To decentralize an activity or organization is to distribute its functions and powers, rather than have its authority concentrated with a central entity. Blockchain technology has been a disruptive force for decentralization in many ways.

Recently, we’ve seen blockchain’s potential to create value in finance by decentralizing traditionally centralized systems.

We refer to these innovations as DeFi.

Uniswap: the Champion of DeFi

One of the most disruptive forces in decentralized finance has been Uniswap, a platform which allows participants to store their capital in a “liquidity pool” where all liquidity providers get a % of transaction fees on their stored capital.

This is a lot like what a bank does with your savings. They hold your money and generate revenue on it, typically by lending capital / facilitating transactions for interest and fees. In return, your bank will offer you a yield on your stored monies. A “high-yield” traditional savings account today might offer you an interest rate around ~0.5%.

Uniswap decentralizes this structure by cutting out the bank. With no centralized intermediary managing funds, transaction fees go straight to the user. Individuals who stored their capital in Uniswap liquidity pools were earning double and triple digit interest rates — a far cry from the returns seen on traditional savings accounts.

Uniswap is just one (very good) example where DeFi creates value.

The DeFi Problem

Still, with all the potential that DeFi has, many projects labelled “DeFi” are not creating value — in the sense that they are not disrupting traditional financial systems. And some of these projects have shaped a negative stigma around the DeFi space.

We’re mostly referring to the projects that flooded in through the APY (annualized percentage yield) boom of July — September, 2020.

These APY-maximizing projects (YAM, BURGER, PIZZA, etc.) were not creating new innovations in the DeFi ecosystem. They were memes, building speculative money games for degen traders to play with. Still, they went on to define the DeFi hype of 2020.

While projects like Uniswap laid the groundwork for this surge, copycats like Sushiswap and Pancakeswap went on to steal the show. Many traders weren’t trading anymore — they were instead “saving” and tracking their profits through bewildering, unsustainable APYs.

There’s no doubt that this was a fun, introductory chapter for DeFi. But it has given many people the wrong idea; DeFi isn’t about 300% APYs — it’s about disrupting traditional financial systems with real innovation.

Creating True Value in DeFi

I encourage readers to evaluate DeFi with a clean slate, not sullied by the rise and fall of previous meme projects. What’s more important are the technologies creating true, lasting value in the DeFi ecosystem. These projects will disrupt antiquated financial systems. It is not a question of if, it is a matter of when. DeFi is here to stay.

We encourage readers to learn more about projects like Uniswap, Aave, Synthetix, Ampleforth, and Base Protocol.

Base Protocol: The S&P 500 of Crypto

Base Protocol implements DeFi technologies to create the world’s first tokenized crypto industry tracker. This is achieved through BASE, a token pegged to the total market cap of all cryptocurrencies. This enables traders to speculate on the entire crypto industry with one token. In this way, BASE acts as a highly diversified market index like the S&P 500, but for crypto.

It hasn’t been possible to create an asset like this through traditional means (i.e. ETF or derivative), as it’s basically unfeasible to manage and balance portfolio ownership of 7,000+ tokens. There are also various legal limitations that currently restrict the formation of such an instrument — not to mention that by traditional means, this would be a highly centralized product and custodial fees would make it unaffordable for many users.

By simply pegging BASE price to the total market cap of all cryptocurrencies, Base Protocol cuts through all of these challenges.

The Base Protocol mission is simple — to make it easy for everyone to benefit from the performance of the entire cryptocurrency market in a secure, decentralized and future-proof way.

Learn more about Base Protocol at baseprotocol.org.

And keep an eye out for other such innovative projects in the space. Again, DeFi is here to stay.