The DeFi Opportunity No One is Talking About… Until Now
If 2019 was the year of the emergence of DeFi, 2020 will be the year that DeFi takes off. The valuations of some project tokens that are squarely aimed at the DeFi universe are likely to take off, too. And it’s not just Ethereum, the #2 cryptocurrency that has been on an absolute mission since the total value locked up in DeFi crossed the $1 billion mark. With the recent rise in the price of WAN token, which has almost doubled in price in the past month, we may have started to see this trend spin up. The tag line for Wanchain isn’t “the infrastructure connecting the decentralized financial world” for nothing.
DeFi Has the Potential to Explode in 2020
At the end of last year, Ethereum super-advocate Consensys wrote a blog post that corroborates this thesis called “2019 Was the Year of DeFi and Why 2020 Will Be Too.” It’s a good piece that outlines how far the fledgling DeFi industry came in 2019. The truth is, and the price of Ethereum cutting through the $200 range like a hot knife through butter underlines this fact, that DeFi has a lot further to go in 2020.
The main takeaway from the Consensys post is that “open protocols and applications can be leveraged to create something new.” The article ends with the caveat to “remember that this movement is not merely throwing out the old financial system, but rather integrating with the current system where possible and creating where necessary. The new financial system must serve everyone, not only the already crypto-initiated.”
We have a problem with DeFi that often gets overlooked. As it is currently constructed, decentralized finance merely brings further decentralization to assets from projects that already are in various states of decentralization. However, there are still not easy pathways for centralized financial platforms to decentralize themselves. Traditional financial firms cannot even dip their toe in the water. Not even a little bit. In other words, DeFi has yet to be effectively brought to TradFi.
That’s really important because, yeah, I think DeFi will get to $10 billion in total value locked-up (TVL) by the end of this year. By the way, my estimate is across all chains, including Wanchain, Cosmos, Ripple and other projects including some that are speaking at our Insights Online Summit hosted by both FinNexus and Wanchain. But Defi Pulse, the main information provider for the DeFi industry, regrettably only tracks TVL on the Etheruem chain. That’s wrong. We’ll have to fix that. But other chains besides Ethereum have to prove themselves first. Part of the promise of DeFi in 2020 is seeing other chains implement robust DeFi dapps, apps, platforms and protocols.
That’s exactly where FinNexus comes in.
Bringing the DeFi Ethos to TradFi Assets
Even though $10 billion locked up in DeFi protocols and platforms this year would be a tremendous accomplishment, TradFi is measured in trillions. To use some of the figures quoted in the previously mentioned Consensys post, stock markets house $70 trillion of value, debt markets $200 trillion, and derivative markets, the so-called “holy grail” of pure finance, facilitate over $550 trillion of value. That’s $820 trillion locked up in TradFi versus an optimistic scenario of $10 billion locked up in DeFi. So while we’re all enamored with the potential of open finance and DeFi, and really the tooling that has been developed and is under development so far is nothing short of amazing… Regrettably, TradFi is going to be a market that dwarfs the DeFi space for a long time. It is what it is.
And yet, most DeFi projects just focus on creating new uses for existing crypto assets. They aim to please what Consensys calls the “crypto-initiated.”
In contrast, the team at FinNexus (FNX) thinks there is a lot of room in this emerging DeFi space to create new use cases for existing real world assets by using crypto technology. That’s why the developers, investors and advisors at FinNexus are so excited about being involved with this project. We aim to bring DeFi tooling and innovative solutions directly to the TradFi world. It’s literally our slogan: “Bridging decentralized and traditional finance.”
This perspective makes FNX wholly different from nearly all the great DeFi projects that are currently out there. We love Compound, Uniswap, MakerDAO, bZx, and all the others. One of our co-founders, Ryan Tian (on Twitter as rainiefield), has even spent quite a bit of time breaking down two of the most prominent DeFi projects on this blog. Here is a great analysis of the future of multi-collateral DAI. And here is an analysis of the XYK model for automated market makers popularized by Uniswap and currently being challenged by Thorchain.
But still, the criticism remains. Most extant DeFi projects merely offer further decentralization of crypto-assets that are already somewhat decentralized. Only Synthetix is somewhat of an exception to this rule, but although they have the mechanism in place to tokenize real-world assets, their dashboard shows that they have only so far been able to do so for less than $2 million worth of assets, mostly synthetic fiat currencies. More work needs to be done in this arena. FinNexus aims to do just that by bringing the DeFi ethos to traditional financial assets.
Overview of Existing DeFi Business Models
Before we see more innovation in DeFi protocols and platforms, we need more innovation in DeFi business models. Currently, there are four DeFi business models that have any traction.
Lending Platforms
First, there is the original over-collateralized lending model pioneered by Maker. Now there are tons of these type of platforms out there. One might even say too many! Mimicry is the highest form of flattery. For some reason, people lump in BlockFi (no utility token) and Celsius Network (CEL utility token) into DeFi, even though for the life of me I can’t understand why. The “De” in DeFi stands for “decentralized” and when you give up custody of your coins that to me is the threshold upon which, once crossed, you enter CeFi. Don’t get me wrong. I’m down with these companies doing what they’re doing and use BlockFi myself, but to call them DeFi, to me, seems a little disingenuous. Some work is being done on under-collateralized lending protocols but these platforms are still under construction as far as I know.
Decentralized Exchanges
The second successful business model in the DeFi space so far are decentralized exchanges, usually called dexes. There are a variety of high-quality dexes out there like KyberSwap, Bancor Network, IDEX, ones based on the 0x Project and many more on the way. In the Wanchain family, we are excited about the forthcoming release of the world’s first cross-chain dex with orderbook, WRDEX managed by Rivex.
These two business models — lending and dexes — make up the majority of what is called DeFi today.
But that doesn’t mean that these two business models will always dominate the DeFi space. The blockchain industry is about the most quickly developing, rapidly iterating economic sector out there. New business models are bound to arise that put the true power of DeFi into the hands of more and more individuals.
Synthetic Assets
The on-chain synthetic assets business model is still under-pursued. Synthetix (SNX) pioneered the use of its own utility token as collateral for making other on-chain assets. In their model, they call them Synths. We’re likely to see a lot more projects using this kind of model in the future, if only because the SNX token, up more than 20x, was one of the best performing coins of 2019. Much in the same way that Chainlink (LINK) was the only decentralized oracle provider for a while but now faces competition from Band Protocol (BAND) and Tellor (TRB), I think you will see other platforms, hopefully not just confined to Ethereum, that issue their own collateral utility tokens that back their own suite of synthetic assets. You may even one day see as many synthetic asset issuers as you see crypto lending platforms and dexes. But like LINK, it will be difficult to overtake the lead in the space that SNX has built. That doesn’t mean that projects won’t try!
Automatic Market Makers
Recently, there has been much made of the automatic market maker (AMM) model pioneered by Uniswap and recently furthered by THORchain, which I wrote about myself in a previous SteemLeo blog post. Uniswap, which saw the assets in its liquidity pools increasing by more than 50% in the month of January 2020 alone, has been absolutely killing it. THORchain is still in beta but will not be restricted to just Ethereum-based assets like Uniswap. Clearly, there is huge interest in staking assets into AMM pools to earn spread fees. It will be interesting to watch these two platforms battle it out once both are live.
In conclusion, these four business models — lending, dex, synthetics, and AMM — are the extent of DeFi so far. There are some interesting use cases in the field of insurance, particularly Nexus Mutual, that we’ve looked at at FinNexus. But the primary means for collecting, earning and distributing DeFi platform and protocol rewards these days seems to be wrapped up in the four business models defined above.
To be honest, there is just so much more to explore.
Innovating New DeFi Business Models
Those great DeFi projects are almost all exclusively focused on crypto-only assets. What I am spending my time on — both as Blockchain Lead at Konstellation Network and Strategy Advisor here at FinNexus — is not about crypto-only assets. It’s certainly a big part of what I’m interested in, but I don’t think that’s where the biggest prize is to be had.
Konstellation hopes to build an on-chain ecosystem that will make it easier for its existing partners (mostly large financial institutions) to invest in and benefit from blockchain technology. FinNexus aims to bring a suite of DeFi tools to TradFi and vice versa, to infuse the blockchain space with more real world TradFi assets.
There’s a huge market opportunity out there in helping build bridges between TradFi and DeFi that almost no one, except for perhaps Ripple and the Interoperability Alliance members (WAN, AION, ICX) among the big infrastructure chains, seems to be building toward. It’s going to take some time and it’s not going to be easy, but with a concerted effort to build robust and easy-to-use tooling that both individuals and enterprises alike can use, we can bring the trillions of dollars of value locked up in TradFi to Defi
That’s the DeFi opportunity no one is talking about… until now.
That’s exactly what FinNexus is aiming to do.
About FinNexus
FinNexus is the open finance protocol built on the Wanchain blockchain. It is a hub for connecting different decentralized ledgers to each other and users, and also for connecting with traditional finance applications. The first iteration of FinNexus will be a marketplace for hybrid decentralized/traditional financial products.
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