Jason Chew, Celebrus Advisory
While the business media is making wall-to-wall coverage with Bitcoin’s comeback story and its current rally, a stealthy and related trend is shaking up the corridors of crypto-based finance.
Decentralised finance (or popularly referred by its “DeFi” buzzword) is a fast growing financial ecosystem made up of various decentralized, non-custodial financial products. The simplest definition for DeFi are financial products that operate without intermediaries. Instead of interacting with a bank, DeFi users can interact with smart contracts; automated computer programs that are publicly verifiable on an immutable tamper-proof distributed ledger; known as a blockchain.
In 2020, we have witnessed the unprecedented growth of of these financial products that include:
• Lending Protocols
• Decentralized Exchanges (DEXs)
• Synthetic Derivatives
In summary, DeFi protocols earn the DeFi tag when they are, at least in principle or ambition, non-custodial and decentralized.
• Non-custodial means the teams behind the protocols do NOT manage your money on your behalf. Unlike depositing money in a bank, DeFi users always maintain control over their money, interact with protocols directly from their wallets and can withdraw anytime if the smart contract permits.
• Decentralized means the teams behind the protocols would vote themselves out of power and hand that power over to the community; usually via distribution of a governance token. Holders of the governance token would vote and determine the future of the protocol.
The success of DeFi in 2020 gives a glimpse of what changes can be expected in the near future:• Financial products that are global from launch day.
• Financial products that are regulated by code, not human operators.
• Financial products that are governed by communities instead of companies.
• Financial products that operate 24/7, lightning fast and have no downtime.
Here are our predictions for the year ahead:
1. Bitcoin may experience another run of parabolic growth. Bitcoin is becoming ‘safer’ for institutions to purchase from a legal and reputational standpoint. In 2020, institutions e.g. MicroStrategy, Square Inc, Paypal have bought over $21 billion of Bitcoin in reserves.
It’s always hard to be the first to do something but it is not that hard to be the 16th person to do something. Because institutions take time between 6 to 12 months to execute their new buy positions, the actual effects of institutional demand may only be realized in Q3 of 2021 or thereafter.
2. DeFi will extend its positive growth trajectory well into 2021 as more bridges bringing Bitcoin to DeFi will emerge, and as more users from traditional finance discover DeFi in search for better yields. Existing DeFi protocols e.g. Compound (variable interest), Aave (fixed interest) will continue to churn out new products e.g. credit delegation and improve user experiences.
New incentives will be introduced by neighboring blockchains such as Polkadot, Cosmos, and Cardano to entice users and attract liquidity to their own versions of Compound and Aave to compete in the DeFi space.
3. We will see the old and new constructs of financial systems converge. New money market services and instruments that support Central Bank Digital Currencies (CBDC) will emerge as there are various government-led projects with digital asset industry players in the offing. China’s DCEP may be the frontrunner but there are many others on its rear view.New tokenized versions of synthetic derivatives, treasury bonds or even treasury bills will leverage distributed ledger technologies for faster, efficient, reduced settlement risks, and more secure transactions.
As crypto-based finance carry risks, we urge readers to tread cautiously and responsibly.
