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Fortune: DeFi vs. Wall Street

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As a largely unregulated sector of the economy, DeFi has exploded with demand for cryptocurrencies such as BTC and ETH.

原文标题：《《财富》封面报道：DeFi 正在占领华尔街》

By Robert Hackett

Hu Tao, Chain Catcher

Today, Fortune magazine published a series of cover stories on the topic of "Encryption vs. Wall Street." In the story "Crypto-based DeFi Is Occupying Wall Street," the author describes the experience of using DeFi products and surveys the impact of DeFi in traditional financial markets. At the same time, it summarizes the coping methods of some traditional financial institutions.

This summer, I took my first steps toward becoming a degen. The word -- short for "Degenerate Gambler" -- comes from the $1.5 trillion cryptocurrency world, where cheeky speculators have adopted it as a cute term. I stepped into one of these clubs, a "Pool" party hosted by a digital-only organization that would love to replace your bank one day.

The campaign is a "lossless lottery" run by an app called PoolTogether. Leighton Cusack, who co-founded the project two years ago, prefers another name for the game: a savings account linked to a bonus. While traditional savings accounts pay meager interest among all depositors, PoolTogether often doles out big bonuses to a few winners.

At the end of July, the app had nearly $200 million in total deposits and paid out nearly $100,000 a week in bonuses. While this makes PoolTogether sound a bit like a casino, much of its activity involves playing the role of a bank. The app can take deposits, lend money and pay interest.

But this is not a bank. There are no concrete vaults, no tellers, no supervisors. In fact, no company controls the project. Unbelievably, PoolTogether runs entirely on software. Cusack and a group of online collaborators quickly developed the app using open source code and the cryptocurrency section, built a beautiful website, and rolled it out in full. The program runs on Ethereum, a global network of computers that collectively list a distributed ledger through which interest and prizes are handed out each week.

PoolTogether is a prime example of decentralized finance, or DeFi, a booming part of the ever-changing crypto economy. PoolTogether and similar projects are attracting a generation of tech-savvy tinkers, early adopters of cryptocurrencies, out-of-the-box thinkers and, occasionally, another, largely independent financial system. In this system, they can borrow, lend, save and insure according to rules of their own making.

While not the largest DeFi project, the structure of PoolTogether is typical of this emerging world. People who deposit assets earn loyalty points in the form of tokens, allowing them to vote in PoolTogether's direction. Savers accumulate more project tokens over time, even if they never win a lottery draw. People can sell these tokens on cryptocurrency exchanges for a profit, which is another incentive to participate. (At the time OF my participation, one token was trading at about $10, down from a high of $32 in March.)

It's an all-crypto world: In almost all DeFi projects, deposits and income are denominated in cryptocurrency, not fiat currency. Also, it's important to note that assets are not covered by the federal insurance system that protects "normal" accounts.

As a largely unregulated sector of the economy, DeFi has exploded with demand for cryptocurrencies such as BTC and ETH. Most of the activity is taking place on ethereum, the second largest crypto network, whose blockchain comes with a built-in programming language, Solidity, which makes it easy to build so-called decentralized applications. For now, the users of this ecosystem are mainly people who are happy and enthusiastic about cryptocurrencies -- despite its risks and legal uncertainties.

But this isolation may not last. DeFi represents a concerted crowdsourcing effort to make digital tokens work, providing people with financial reasons to hold them, rather than just guessing where prices will go. Olaf Carlson-Wee, one of the first major investors in the crypto market, said cryptocurrencies are "ultimately more than just a new gold or a new currency." He described DeFi as of "earth-shattering importance", adding: "It's not just about assets, it's about all financial instruments."

That fact, in turn, could pave the way for mainstream consumers. In the not too distant future, the Fed is expected to decide whether to coin its own digital dollars or have the private sector back such issuance.Both moves could open up blockchain-based services to the masses, and today's evolving DeFi infrastructure could shape a new financial order.

This possibility is attracting a growing number of established financial firms to the DeFi industry. What started as a plaything -- fans call the DeFi tools "Lego for Money" because they're so easy to assemble -- has now drawn the wider commercial world into its orbit. In this massive reorganization of fortunes, nerds have taken the initiative. They're trading in their Brooks Brothers suits for blockchain. Software is finally eating into finance.

DeFi uses blockchain as a slingshot to hurl rocks at the giants of Wall Street.The promise of this technology has always been to make transactions less costly, more efficient and fairer by replacing intermediaries with shared, instantaneously updated distributed ledgers that anyone can monitor.

Although the bank has office hours and observes holidays, DeFi never sleeps. Whereas agencies use paperwork and committees to make decisions, DeFi relies on algorithms. While "OldFi" wire transfers and stock trades can take a few days to settle, ethereum-based transactions are relatively immediate, typically taking about five minutes for final confirmation.

"It's fast, it's open, it's unlicensed, it's transparent." Mike said Novogratz. He is a former hedge investor who now runs a crypto investment and financial services company called Galaxy Digital. He said,Fewer intermediaries also mean less systemic risk."If we could have looked at the information shared on the blockchain and looked at bear Stearns's mortgage exposure, we wouldn't have had a mortgage crisis in 2007."

For every traditional centralized financial product, there is a cryptocurrency-related DeFi version that has either been launched or is in development. New to the crypto market? Buy some tokens on Uniswap's decentralized exchange. Borrow money? Look at AAVE's "flash loan". Insurance? Nexus Mutual has a protection plan for you. Want high-yield savings? Using Compound Loans, one of the loan agreements PoolTogether relies on.

At the heart of these operations, there is no chase from jpmorgan, and no Nasdaq. It's all just code. A community of software developers and token holders -- people who own virtual tokens distributed by various crypto projects -- runs the show. According to Rebecca Rettig, Aave's legal adviser,DeFi's commitment is to "give individuals autonomy in their own financial situation".

DeFi is still largely going through growing pains, not least because it is based on cryptocurrencies, whose prices are notoriously volatile. The total value locked in DeFi projects peaked at $90 billion in May, then collapsed as cryptocurrency prices plummeted.

Still, deposits in these blockchain-based projects totaled more than $60 billion as of late July, up from less than $1 billion in early 2020. If all DeFi applications were considered a bank, it would be among the top 50 in the US in terms of assets under management.

It is hard to say how many people attended DeFi events. Creating a blockchain wallet is a passport to any project, requires no ID (a feature that has alarmed many regulators), and many users have multiple wallets. Still, the number of wallets interacting with the DeFi protocol has soared from nearly 300,000 to more than 3 million over the past year, according to Dune Analytics. Crypto wallet provider MetaMask counted more than 8 million active wallets worldwide in July.

Brian Brooks, CEO of cryptocurrency exchange Binance.us, said that given how much capital DeFi has attracted from hedge funds, deep-pockets investors and retail enthusiasts, "it can no longer be ignored." Brooks, who served as the top U.S. bank regulator during the last year of president Trump's administration,Blockchain applications will do to banks and brokers what the Internet and Amazon have done to brick-and-mortar retailers -- forcing them to compete in a new tech-driven game or die.

"It raises the question of whether we really need these agencies to perform these intermediary functions." 'If I were the head of Bank of America, I would be concerned,' Mr. Brooks said.

If the chief executives of the big banks are worried, they are not saying so publicly. But established institutions are starting to explore DeFi -- assuming that younger customers are happy with both encryption and app-driven financial services and will eventually demand it.Fintech firms have bought into the clamour.

In a blog post in June, Brian Armstrong, CEO of Coinbase, the largest CRYPTOCURRENCY exchange in the United States, wrote that "what crypto users are using today will be used by mainstream customers within a year, and institutions within a few years." Payments giant Square announced in July that it was setting up a Bitcoin-focused DeFi business.

"We're in the midst of a major shift," said PayPal CEO and President Dan Schulman. The time is ripe to use cryptography to modernize the financial system.

The old guard joined in. Companies such as jpmorgan chase, Wells Fargo and Goldman Sachs have hedged against a potential bankless future by pouring millions of dollars into crypto start-ups. Visa, a giant of the credit card era, has partnered with Anclage, one of the newest federally chartered banks, to accept commercial payments in privately issued digital tokens, such as dollar tokens linked to the U.S. dollar. Companies may increasingly start trading against such portals, even if their own business is settled entirely in DOLLARS.

Diogo Monica, co-founder and president of Anclage, said banks "want to build a relationship with these millennials, the next generation that's going to inherit trillions of dollars from the baby boomers... There's a lot of distrust of these traditional, centralized financial institutions in this age group." Banks will have no choice but to be legal savvy, he concludes: "It's just a matter of how, when and where they get in."

In dollar terms, P2P loans account for about half of the DeFi market. It also promotes one of its most attractive selling points: higher yields for savers who turn their deposits into loans. DeFi interest comes from a combination of symbolic accruals and passive lending income, and it can reach double-digit percentages. Even single-digit yields exceed the national average for traditional savings accounts, which is just 0.06 per bank.

Stuart Sopp, CEO of Current Bank, told Fortune that his business plans to consolidate the Compound business to generate more revenue. For Sopp, this was a simple decision that had nothing to do with the encryption wave and everything to do with math. "Money is mercenary." "It's going to go where the returns are best. If you can get 5 percent and it's pretty safe, then the money will move."

However, the mechanism behind these debt yields is a bit messy. The jaw-dropping rates are largely due to risk aversion by banks, technical delays and regulatory concerns when it comes to cryptocurrencies. For the most part, banks do not extend credit to cryptocurrency borrowers. Even bitcoin billionaires struggle to use digital tokens as collateral. That puts supply and demand out of kilter -- especially given that many crypto "whales" are eager to make leveraged bets on more cryptocurrencies.

Behind the scenes, the newly rich, including crypto-friendly hedge funds, are paying a premium to get loans from DeFi protocols such as Compound and Aave and specialist lenders such as crypto firms BlockFi and Celsius, which turn to DeFi projects for liquidity. Far better for borrowers to pay relatively high interest -- say 10 percent -- than to sell crypto assets and take a short-term capital gains tax hit of 37 percent or more. At the same time, high-interest loans mean savers are getting far higher returns than normal.

There is a paradox here. As cryptocurrencies and DeFi mature, such high yields may not last: as banks become more comfortable with digital token assets, crypto investors will find it easier to borrow at lower interest rates. At the same time, there is no risk-free return in a world where "yield farmers" move quickly to find the highest returns.In the crypto world, fast-moving money can mean big swings in token prices.

Advertisements for super high returns on bad loans are not uncommon, often driven by supply and demand and wild price speculation. One project, Iron Finance, has shown stunning returns this year. But on June 16, the token TITAN mysteriously crashed within 16 hours, its price plummeting from $64 to almost nothing. Iron Finance claimed it was the victim of "the world's first massive cryptocurrency bank run," blaming whales for initiating massive withdrawals. But chat forums such as Reddit, Telegram and Discord have been rife with accusations of pranks.

Cryptocurrencies and misbehavior are no strangers: From 2019 to April 2021, people lost $6.5 billion in cryptomoney-related fraud and cybercrime, according to blockchain analytics firm CipherTrace. Massachusetts Democratic Senator Elizabeth Warren, who calls cryptocurrencies the "Wild West of investing," told Fortune that the risks are magnified when it comes to DeFi. "There, anonymous developers can defraud investors with no transparency or accountability through scams such as plunges."

In a community whose philosophy underpins decentralization, accountability is a major issue that needs to be addressed. Back in 2019, Compound co-founder Robert Leshner used to wake up in a cold sweat, worrying about his responsibilities. If the code is buggy, can he and his team make up for the damage? "I was afraid to leave the house because I thought someone would kidnap me and try to steal all the money in the yard." Leshner tells Fortune.

Leshner's solution is akin to retirement. His team created a governance token Comp and gave control of the agreement to the Compound community, to the people who received and owned the Comp tokens. Now it's collective responsibility.

For most DeFi projects, the model for Compound is standard: The base unit is not a registered corporation, but a DAO, or decentralized autonomous organization.What these projects have in common is that no one is in charge, or everyone is in charge to varying degrees.Each token holder has the right to vote on management decisions of the protocol, such as updating code, setting parameters related to interest rate calculations, or providing funds to developers to build new features.

In practice, it is usually full-time hobbyists and institutional investors who take part in most of the voting, rather than regular users. In any case, they have a common goal: as more people use the protocol, the digital tokens behind it become more valuable. The idea of building a better program so that everyone involved will be richer began.

However, these tokens come with their own risks. Their volatility increases the risk of any DeFi project:If your cryptocurrency earns you 9% interest, but your principal value drops by 75%, you're not a winner.

There is also the unresolved legal question of whether a token is simply a security by another name. The SEC has decided on several occasions that this is the right thing to do.

Ripple and its officers have been sued by the SEC for allegedly selling unregistered securities in the form of XRP digital tokens. The same logic, if applied to DeFi, could dramatically change the way it works.

"I think the fall of 2021 will be very similar to the regulatory investigations we received in 2017 and 2018, when numerous information requests and subpoenas were sent from the SEC to early encryption innovators." Crowell& Michelle Gitlitz, head of the blockchain practice at law firm Moring, said people may have tried to comply with the law, while governments and regulators may disagree at all.

At the same time, DeFi's pioneers continue to work at a technological maturity with "degen In the atmosphere of the experiment.

Digital confetti and rainbow ribbons rained down on the screen in celebration as I deposited 15 DAI (a token pegged to the US dollar) into Pooltogether and entered the draw together. I'm with $35 million in other savings. I have a 1 in 468,660 chance of being one of the five winners who split the $25,000.

As I waited for the results, I entered the Discord community conference call, a chat app that many DeFi projects use as a virtual headquarters. The PoolTogether Discord group, which has nearly 6,000 members, had dozens on the line this day. At some point, the conversation turned to marketing efforts. The partners are looking for a way to explain to the average user why they should put their "baby boomer money" into PoolTogether. One participant, who goes by the pseudonym Oops, explained that he was pitching the virtues of DeFi savings to his father. "I tried to convince him to change things." Oops said.

While we were chatting, I checked the lottery ticket. A message popped up on the website: "Uh-oh! An error has occurred and we have been notified." "Don't worry! Your money is safe, it's just a user interface issue," the note said.

Back on the conference call, someone asked Oops's dad if he was convinced. "I have to educate myself further." "Said the father doubtfully.

As for me? When I checked back later, I knew I hadn't won. But it's still early. Maybe next time I'll get lucky.