By now very few people are unaware of the significant interest that Bitcoin has once again received over 2020’s last quarter. As of writing the price has appreciated by more than 280% - which is incredible for an asset that is mainstream on in that everyone’s uncle and aunt has dabbled in it. Price action is driven mainly by an enormous deficit between supply and demand, with miners selling their issuances and institutions looking for a piece of the pie — endowments, hedge funds, family offices — you name them.
As with all the cycles I am excited to see the adoption of digital assets as a socially accepted store of value and transfer mechanism, but what has captured our serious interest is the usage of public networks to disrupt the financial industry as we know it. To date, these distributed networks, blockchains as they are commonly known, have been mainly used for asset creation but only recently has actual utility entered into the fray.
Enter decentralized finance, or DeFi as it is commonly known, a sub-industry that has taken hold within the Ethereum ecosystem growing in 2020 from US$ 500m to US$ 20B of assets locked in the network’s various protocols. The majority of these assets are stable coins, in other words, quasi-pegged digital dollars that live on the blockchain.
To name a few of the protocols
Compound — an open-source money market protocol that lets users lend or borrow assets against collateral.
Curve Finance — an automated protocol designed for swapping between stablecoins with low fees and slippage.
Project Serum — decentralized derivatives exchange with trustless cross-chain trading.
Uniswap — a fully decentralized on-chain protocol for token exchanges that uses liquidity pools instead of order books.
The best way to view this application of blockchain technology is that it is a form of automation that has entered the finance and investing arenas. Services are facilitated by protocols in the form of computer code and not financial services companies, thus massively reducing frictions that the current system perpetuates such as exorbitant fees and limitations to access to name a few.
At Lima, we have kept a close eye on these developments over the last year and we have come to a point where we believe that these developments have proven the success of the concept. We are welcoming the change and opportunity and plan on offering the benefits to our clients where possible.
More to follow.
