Why 2020 Is the Watershed Moment That Crypto Investors Have Been Waiting For
Cryptocurrencies are on the cusp of a second revolution with the invention of Decentralized Finance. This makes 2020 a watershed moment.
Cryptocurrency has created an opportunity for thousands of people to build their own fortunes but it hasn’t yet been the whirlwind of transformation that many early adopters hoped it would be. That could all be about to change thanks to the next great blockchain development: Decentralized Finance (DeFi).
Cryptocurrency Still Lacks Utility and DeFi Could Fix That
The big problem up until now is that most cryptocurrencies, bar specialized projects like Ethereum and Ripple, have had limited real-world utility. For example Bitcoin acts as an excellent store of value. But slow transaction times and high volatility makes it unsuitable for day to day purchases, and there are precious few ways to make the asset work for you without resorting to risky speculation. This has the additional effect of increasing volatility as speculators attempt to beat the market.
The solution to this problem lies in Decentralized Finance. DeFi covers a wide range of projects but almost all of them are designed to build a decentralized facsimile of existing financial institutions and instruments. These institutions form the foundation of our modern financial world and decentralized mirrors could be the key to bringing true stability and utility to the cryptocurrency sector.
There are a number of important developments but the two most significant at the moment are lending platforms and exchanges.
Currently, if you want to buy cryptocurrency you are faced with two options. One, go through a centralized exchange, and jump through all the hoops that come with it. Two, take a gamble on a Peer2Peer exchange and sacrifice security for privacy. DeFi exchanges are designed to be the best of both worlds.
Rather than using algorithms to ensure trades are met, these exchanges rely upon smart contracts. This helps to provide the security and liquidity offered by centralized exchanges, without having to keep your cryptocurrency in an exchange wallet, which represents a security risk.
This has helped provide a big boost to both the price of Ethereum and UniSwap itself but there are concerns that the exchange has overleveraged itself and that this is unsustainable.
The recent failure of UniSwap to extend its “farming” offers could bring some short term instability to the space. However it is unlikely to kill the exchange and even the CEO of Binance has admitted that decentralized exchanges could cannibalize his business.
Decentralized lending platforms provide an easier way for individuals to access cash using cryptocurrency. The platforms utilize smart contracts to set up terms and connect a willing lender with a borrower. This is invaluable to the unbanked population of the world as it allows them to more easily access finance without being forced to go through extensive due diligence processes that often deny credit to the people who need it most.
Like Uniswap, these platforms also offer high interest rates in order to attract lenders. There are a large number of DeFi lending platforms in existence and the DeFi sector has attracted over $13 billion in locked or staked cryptocurrency.
This crowded marketplace has also led to an arms race in interest rates, which has then led to the process of rate farming. This involves lenders constantly moving their cryptocurrency stake to ensure the best returns for their crypto holdings.
The problem with this practice is that it has led to unsustainably high interest rates. Failed projects could cause problems for investors with cryptocurrency staked there. That is where one of crypto’s most interesting projects steps in.
Yearn.Finance initially began as an attempt to act as a decentralized portal to DeFi and improve access and liquidity in the sector. The project is used by many investors as a yield optimization tool to help ensure their cryptocurrency is being optimally staked.
One of the ways it does this is using its yPool on Curve. Users are able to deposit tokens that are converted into yield optimized tokens (yTokens) that allow users to acquire lending and trading fees. This has helped Yearn.Finance provide some of the best lending rates in 2020.
While this is impressive in its own right, the most interesting aspect of Yearn.Finance is its governance. Like many other crypto projects, Yearn.Finance relies on tokens to provide “votes” on the direction of the project's future. However, what sets the project apart is that the tokens do not denote ownership of the project itself.
While voters will be remunerated in exchange for “staking” their token to an issue, the recently proposed manifesto has made it clear that the YFI governance token is simply there to provide a voice for community members, not serve investors who wish to maximize their return. This theoretically means that the only people buying Yearn tokens are those who care about the project for reasons beyond financial returns.
What makes this especially interesting is the fact that the project’s founder, Andre Cronje, gave away his entire YFI holding to key liquidity providers in the network. This equates to him ceding control of his idea to the community.
This is a powerful statement, especially when compared to more centralized projects like Ethereum. If Yearn.Finance’s experiment in government proves successful, it could change the way crypto projects are built forever.
Projects like Yearn.Finance or Uniswap demonstrate that the crypto sector is beginning to mature and this has not escaped the notice of key fintech players. Banks have been toying with crypto projects for some time but arguably the most important development of 2020 was PayPal’s announcement that it is allowing US residents to trade cryptocurrency within its network.
This won’t be of much use to grizzled crypto vets but it significantly lowers the barrier of entry for crypto novices. Additionally, Paypal’s plans to make it possible to spend Bitcoin and other major cryptocurrencies within its own merchant network means that there are now potentially 22 million companies that can easily, and safely, accept cryptocurrency payments. This will significantly increase the day-to-day utility of Bitcoin and other cryptocurrencies.
The option has proven popular and in just one month, Paypal has reached 85% of Binance.US’ volume with over $25 million in trades. Paypal’s Bitcoin volumes still sit below those of major US exchanges like Kraken, which trade in excess of $500 million per day. However, the fintech giant’s crypto offering is still limited and there appears to be a strong appetite for the service on their platform.
If these trends continue, it is likely that we are seeing the beginning of the second crypto revolution. As cryptocurrency becomes more usable, and accessible, it is likely that long term volatility will decline and that the sector will rapidly mature.
This will also make more companies likely to leverage blockchain technology and crypto solutions as part of their existing offering. And that could spark yet another wave of innovation, making 2020 a landmark year for cryptocurrency general
Written by Gihyen Eom
Edited by Calvin Ma, Professor Jim Kyung-Soo Liew, Jack Argiro & Michael Ding
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