Forget Dogecoin, the future of crypto is DeFi

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Last week, Twitter CEO Jack Dorsey announced that Square, the financial firm he also runs, will launch a new platform to create decentralized finance projects using bitcoin. Amid the usual and constant online noise surrounding the cryptocurrency staring at you, Elon Musk these days, you would be forgiven for not giving Dorseys the time of day. Yet Project Squares could end up being remembered as a watershed moment when decentralized finance, or DeFi, finally entered the mainstream.

In recent years, DeFi has become one of the most important developments that reshaped the world of cryptocurrency. Rather than Bitcoin, its rise has been closely tied to Ethereum, the world’s second-largest cryptocurrency, whose decentralized network or blockchain enables the delivery of services and the performance of tasks more complex than sending and receiving payments.

Arguably it all started right after the ICO bubble of 2017, when thousands of entrepreneurs and chancellors raised billions by selling cryptocurrency tokens online as if they were stocks in companies often non-existent. After the crash, Ethereum began to crawl with a host of DAPP services, or decentralized applications offering a wide range of financial operations, from loans to futures, exchanges, to algorithmic trading.

The selling point, as usual when it comes to cryptocurrency projects, was disintermediation. Users of these services would break free from real-world financial intermediaries, but also from cryptocurrency-focused institutions that have become gatekeepers of corporate cryptocurrency exchanges like Bitfinex and Coinbase to Tether, the company behind stablecoin. USDT (a digital asset whose price is theoretically pegged to the dollar). Ethereum’s decentralized financial applications have allowed users to trade without going through the identity checks, anti-money laundering regulations, and other limitations of centralized alternatives. Plus, it was a lot more fun.

The advantages of DeFi are manifold. Number one: It’s theoretically up 100% of the time, isn’t it? So, because Ethereum is still active, so is DeFi, says Lex Sokolin, co-head of decentralized protocols at blockchain software company Consensys. And then there is the composability, the possibility of superimposing.

This means that, on the blockchain, different applications can be programmed to work in sequence, one after another, in a single transaction, with their individual operations arranged and stacked like LEGO blocks. One can easily design a program that would automatically borrow cryptocurrency from a lending platform, throw it on a decentralized exchange in the hope of bringing its price down, redeem it, and return it, eventually pocketing a short margin in a few seconds. Investment strategies become puzzles, puzzles of software commands to be composed on the fly.

You can create the portfolio and when you have the portfolio you can create margin, and when you have margin you can generate interest, and when you have interest you can create a fixed income aggregator and then tokens, etc. and so on, says Sokolin. It speeds everything up, and makes it go really really fast I think 50 to 100 times faster than if it wasn’t built on DeFi.

It’s exciting, but not without complications. People are building really interesting but mostly experimental tools. These are built mostly by hobbyists who don’t understand how real finance works, says Emin Gn Sirer, associate professor of computer science at Cornell University. So some of these LEGO building blocks are quite interesting and do things that Wall Street can’t. But some of them end up interacting in unexpected ways.

One of the earliest and most infamous manifestations of this unpredictability was the flash lending incident that sent waves through cryptoland on Valentine’s Day 2020. On that day, an anonymous trader managed to s ‘To make a profit of $ 350,000 in Ether from the bZx lending platform, after deliberately pumping asset prices on the exchange that bZx relied on to get its price data. The best ? The money used in the helping hand had been borrowed from a platform that allowed users to take out cryptocurrency loans over a very short period of time: hence a flash loan without collateral. The trader had turned no money into a lot of money. Start a debate on whether the trader could be called a hacker or just someone who read the fine print, realized that bZx could be played and acted accordingly.

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