How Long Will Crypto Winter Last?

The last crypto winter lasted for 2 years, it may have lasted even longer if COVID-19 hadn’t sparked DeFi summer in July of 2020. Prior crypto winter cycles only lasted for between 111-547 days, with the average being skewing longer during the last three downturns. The catalyst for a return to the bull market is novel utility, and with more people developing within the ecosystem than ever before, we’d expect it to retain the 15-18 month recovery timeline, and this time around with consumer products breaking through to larger mainstream recognition, though the larger macro-economic environment is a major factor in its recovery as well.

Recovering from crypto winter will continue to be far more tied to the larger environment, specifically the performance and sentiment around the tech sector, which is typically seen as growth stocks and will now need to tamp down growth expenses and shape up its core operations to become an attractive investment to buyers with a risk-averse mindset. This same mindset will affect investing in cryptos and how capital is allocated throughout this crypto winter. Fortunately for those with software development skill sets, writing code is a function of investing time to a goal and can survive in a low funding environment. Teams that are developing software products that address real problems will attract the capital necessary to grow when the time comes, and those that can develop financial traction before raising funds will be in the strongest positions to receive investment. 

What will mark the return of a crypto bull market?

Ultimately the money that often gets spent in wasteful ways during bull market cycles has disappeared, and teams must be far more strategic about deploying capital and focused on building sustainable business models around their solutions if they are going to win out. If we look at historical trends of how long it takes software companies to acquire their first million users or customers, a clear benchmark of success and some modicum of product market fit, we should begin to see the light at the end of the crypto bear market in 18-24 months as projects work towards those noteworthy goals. 1-2 breakout successes from a product perspective could be enough to ignite a longer-term bull market rally.

TradFi + DeFi = New Future

As to how the crypto market will impact the traditional markets moving forward, it’s expected that more and more companies will have exposure to cryptocurrencies on their balance sheets, particularly data-driven organisations whose data silos would benefit from the tokenisation of these assets and the new revenue streams available to them monetising those assets. Forward-looking tech companies will look past the threat of disintermediation by opening up access to their proprietary data models and allowing users to leverage their personal data on competing platforms in order to establish their brand as a leader in the emerging tech space or risk getting left behind. Again, because most software systems are derivations of one another with a fairly common and understood use case they function more as a commodity or utility than a traditional product or service and can be delivered for a fairly cheap cost, meaning that many of these systems will compete on brand of which legacy tech companies would have the first mover advantage with.

There are a lot of externalities that could change the landscape and trajectory of the economic environment for crypto and other financial markets, and we likely have not yet seen the bottom of this crypto winter, so bundle up.

About the author: Connor Borrego is a Midwest Based Technology Entrepreneur. He received his Master’s of Science in Business Intelligence Systems from Syracuse University, and he received his Bachelor of the Art’s in Entrepreneurial Communications from the University of Michigan. He has worked for the past decade in the advertising technology industry, most notably as a Startup Growth Consultant for Google. Currently, Connor is commercialising a blockchain-powered software to help musicians increase their earnings as an artist and grow their online audience.

DAOs 

Decentralised Autonomous Organisations have a long and colourful history in the world of blockchain, the first emerging in 2016 following in the wake of Ethereum’s 2015 launch. A DAO is much like a corporate governance structure, albeit managed in decentralised fashion using blockchain technology and largely without the oversight of government regulation (for now). DAOs function by allowing holders of its tokens to vote on how funds within the DAO are directed.

2021 saw some big moves in the DAO space. Wyoming became the first state to formally recognise DAOs, granting them the same legal status as limited liability companies. ConstitutionDAO raised over $43 million to purchase an original copy of the American constitution at Sothebys. The DAO was outbid by billionaire hedge fund manager, Ken Griffin, but this episode clearly demonstrated the ability of DAOs to rapidly raise and deploy capital for a given purpose.

We can expect DAOs to soar to new highs in 2022, with many DeFi protocols now using DAOs to govern their future. Meanwhile, a host of new NFT DAOs are emerging to support collective investment in NFT art. Those looking to direct the future of DeFi or invest in a protocol’s future might consider investing in DAO tokens like Maker, UNI, AAVE or BitDAO. More interested in NFT art? Look into FingerprintsDAO, SquiggleDAO, and FlamingoDAO.  Ownership of these DAO tokens will give the holder voting rights in the DAO.

Music NFTs

An NFT, or non-fungible token, is a unique blockchain record managing ownership of a particular digital product like a piece of art and is sometimes also linked to a physical representation. 2021 saw an incredible boom in visual arts NFTs and this has been a serious boon for digital artists. The refrain of digital artists not being able to get a break in the pre-NFT, infinitely copyable world of digital art has been rapidly changed by NFT tech that makes these digital goods uniquely ownable and tradeable.

While NFTs for visual arts have been around in their current form since 2017 (with many early, archaic renditions that predate even this) music is emerging as another hot NFT phenomenon to watch. Artists like 3lau, Nas and Mike Shinoda have all launched music NFT projects in recent months to high acclaim. Expect more established musicians to follow in their wake as the major record labels seek to wade into the NFT space.

Existing major NFT marketplaces are not currently well placed for this new world of music-on-blockchain as their browsing experience and product offering is optimised for visual arts, not music. As such, we are beginning to see a new breed of NFT platforms emerge to service this space, like Catalog, Zora and Sound.xyz. Another such platform is TokenTraxx, which is introducing a marketplace and mint platform for music NFTs this year. TokenTraxx’s deep relationships with the major record labels and its team of music industry personalities mean that it is well-placed to capitalise on this trend.

Layer 2 Blockchains

A layer 1 blockchain is an independent, standalone blockchain in the vein of Bitcoin, Etherem or Solana. All of these face the blockchain trilemma, that a blockchain can only effectively deliver 2 of 3 qualities: security, decentralisation and scalability. Most early blockchains, such as Bitcoin and Ethereum, value security and decentralisation over scalability. More recent blockchains like Solana sacrifice decentralisation for scalability.

The new, faster L1 blockchains that sacrifice decentralisation for speed will have their work cut out for them to compete against L1 heavyweights Bitcoin and Ethereum, however, because a new breed of so-called layer 2 blockchains have emerged to vastly increase their scalability and speed. A layer 2 blockchain acts in conjunction with a layer 1 chain by allowing transactions to take place much more cheaply and quickly on the layer 2, with an update to the underlying L1 happening at some time in future. The L1 becomes a sort of slow, expensive but incredibly reliable settlement layer, with the L2 providing the speed and low expense required of a blockchain fit for consumers.

With Ethereum fees regularly hitting new highs and L2 solutions beginning to hit their stride, the stage has been set for Arbitrum, Optimism and other L2 solutions to take off in 2022. Rumours abound that these L2 solutions will be offering their own tokens to help support their development and let investors gain exposure to them.

Increased Regulation

It certainly causes concern when adverts for shady altcoins appear on public transport in major cities across the world. Many activities that have been illegal in public equity markets for decades, such as wash trades, pump-and-dumps schemes, and unqualified advertisement of high-risk investments, have yet to be regulated in the realm of DeFi and blockchain. Regulators the world over are looking to get a handle on this and 2022 may be the year when we see firm guidance come from the USA’s SEC, Britain's FCA and other regulators on how financial regulation applies to blockchain.

Garry Gensler, chair of the SEC, has stated that while he has no plans to criminalise crypto, regulation is coming and that crypto markets “need more investor protection.”

Enforcement will doubtlessly become more robust and increasingly invasive scrutiny of blockchain participants can be expected. Blockfi’s $100m settlement with US regulators, the SEC’s first enforcement action against a crypto lender, will not be the last such action we see this year.

Stablecoins, privacy coins and DeFi products are the strongest candidates to find themselves within regulators' crosshairs. Stablecoins are attracting attention because of the risk of them not being properly backed by liquid assets, or the risk of an algorithmic peg breaking. Privacy coins that mask the addresses of senders and recipients in financial transactions are a natural haven for criminals, making them a top regulatory target. With DeFi, the regulatory concern is that most investors are not sophisticated or tech-savvy enough to understand if promised returns are possible, and many DeFi protocols are not as decentralised as one might imagine, making them open to abuse by a bad actor.

Conclusion

While no one can tell for certain what 2022 will bring, it’s likely that DeFi and blockchain will continue to evolve at a breathtaking pace. The market remains young but rapidly growing, and as many millions of new users are on-boarded to DeFi and blockchain by new product offerings from major tech companies like Coinbase and Meta in 2022, this is a space that can be expected to continue to boom.

Inflation has consistently been on the rise, with little positive signs of things to come. The Consumer Price Index (CPI), an instrument that measures inflation by averaging change over time in prices, surged 6.2% in October, marking the largest monthly rise in 30 years.

Meanwhile, economic risks, including supply chain bottlenecks and soaring unemployment, have only gotten worse recently. This has prompted Fed Chair Jerome Powell, who still uses the term "transitory" when addressing inflation, to voice concern over persistently high inflation. 

“The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation,” Powell said last month when revealing that the Fed intends to begin tapering its bond purchases. “I do think it’s time to taper and I don’t think it’s time to raise rates,” he added, insisting that the central bank does not plan to raise rates in the short term. 

The US Federal Reserve has been keeping its benchmark interest rate near zero to support the economic recovery, which was badly hurt due to the pandemic. Currently, the highest paying saving accounts in the US, which are considered high-yield savings accounts, offer around 0.50% APY. However, the national average interest rate on savings accounts stands at 0.06% APY, according to the Federal Deposit Insurance Corporation (FDIC). At times, some banks even pay less than that average.

All of this has led investors to search for alternative methods that offer higher interest rates, in an attempt to match the rising inflation and prevent their wealth from depreciating. 

The Rise Of Hybrid CeFi-DeFi Platforms

DeFi, short for decentralised finance, is an entire ecosystem of smart-contract powered apps that are largely built on the Ethereum blockchain and enable users to lend, secure loans, and trade digital assets - without the need for any intermediaries. This largely differs from the traditional world of finance, where even the top forex brokers need to rely on a number of middlemen to facilitate transactions.

DeFi lending protocols offer a variety of APY rates based on the digital assets users provide as collateral. Normally, the rates are much higher than those offered by banks — and they sometimes even reach triple-digit figures. However, such protocols come with a number of bold drawbacks. 

For one, since DeFi is still in the experimental phase, there is the risk of hacking and exploitation, which can lead to users losing all of their deposited funds. Other forms of concerns include scalability, which is particularly true for newer protocols that boast high APY, liquidity, and a lack of legal protection. 

To address these issues and offer a more convenient method for accessing crypto investment opportunities, CeFi (centralised finance) projects have emerged. In simple terms, CeFi protocols are centralised crypto exchanges like Coinbase and Binance that share some aspects of traditional financial services, as referred to as TradeFi.

There is also another category of financial order dubbed hybrid finance (HyFi). Combining some elements of DeFi and CeFi, HyFi offers a robust solution by integrating the strengths of both sides while eliminating their shortcomings. 

HyFi platforms like BlockFi and Celsius, which claim to be fully regulated, offer notably high APY rates when compared to a traditional, FDIC-insured savings account. A BlockFi Interest Account (BIA) can offer up to 9.5% APY, for example. So, what’s the catch?  

Are Stablecoin Yields Too Good To Be True?

At a time when interest rates by banks are anchored near zero, the fact that hybrid platforms offer near double-digit interest rates might stir up scepticism. However, some of these platforms have built an impressive user base.

BlockFi, for instance, boasts more than 1 million unique users with over $10 billion in assets under management (AUM). Celsius, similarly, boasts more than 1 million users and more than $28 billion in AUM. The latter also claims to have paid more than $946 million in rewards since its launch in 2018.

Nevertheless, there are still a set of unique risks associated with these platforms. In the first place, unlike FDIC-insured savings accounts, hybrid platforms offer no insurance. While they might take additional measures to protect funds, like keeping crypto holdings in cold storage, there is still the possibility of losing all capital. 

Moreover, users need to probe the reputation of the platform they are considering to deposit funds. Gemini Earn, BlockFi, and Celsius stand among the more popular options. Despite their popularity, some may face legal issues, which prospective users need to research. Further, newly established platforms, especially if they are offering above-average rates, should not be easily trusted. 

It is worth noting that these platforms offer yields on crypto-assets, particularly on stablecoins. Stablecoins are fiat-pegged digital assets that strive to hold their prices stable. USDT and USDC, pegged to the US dollar, are the two most popular stablecoins, with USDT commanding the lion's share of the market. These stablecoins themselves, also require scrutiny.

Stablecoin Risks

Many stablecoins originally hit the markets alleging that they are 100% backed by cash reserves. However, as transparency around these digital assets increased, it became apparent that they might be backed by some illiquid assets. For instance, USDT is largely backed by commercial papers and fiduciary deposits. The quality of these assets is unknown, making them exposed to unknown levels of liquidity risk. Therefore, in the event of a run on USDT, if Tether fails to provide enough cash, USDT tokens would crash.

Stablecoins are also exposed to regulatory risks. Back in July, Treasury Secretary Janet Yellen voiced concern around stablecoins, saying they should be “quickly” regulated. At the time, Powell also scrutinised stablecoins, arguing that the US could undercut the need for these digital assets by issuing a CBDC.

"You wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency – I think that’s one of the stronger arguments in its favour,” Powell said, though he later made it clear there is no intention to ban stablecoins. "If they’re going to be a significant part of the payments universe…then we need an appropriate framework, which frankly we don’t have."

Echoing the same point of view, SEC Chair Gary Gensler has asked for stablecoin regulation. In September, he likened stablecoins to "poker chips," claiming that people will "get hurt" without stronger oversight. More recently, Gensler insisted that the SEC would "be very active" in regulating stablecoins.

Conclusion

The rise of hybrid platforms has opened up new horizons for investors seeking high returns. However, before jumping in, users need to consider the risks associated with these platforms — and decide whether or not it is worth it to move forward. 

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Avalanche

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123 swap Finance

123 swap Finance is also the platform to automate and make the recovery process fast by leveraging bright contracts. The forum will promote decentralised financial management through its smart contracts. 

Critical solutions: Simple and easy to use interface, no change rate during transactions, no hidden charges, variety of assets, security, one-window cross-chain platform.

Through its intelligent cross-chain contracts, it will bring smart, autonomous financial management in one place. 123swap has invented certain technologies that will help the platform beat the competition, become faster, and become the best trading platform in the world.

What is next for 123 swaps?

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The following are considerations that allow users to perform multiple functions on a single platform:

• You can perform various tasks on a single platform.
• View all Defi products in one dashboard
• Portfolio management
• Liquidity pool
• DEX and SWAP aggregators
• Cross-chain asset swap
• Best yield strategy in one place

Conclusion

Avalanche describes itself as an open and programmable intelligent contract platform for decentralised applications. AVAX is used to pay transaction fees and can be staked to ensure network safety. Avalanche is compatible with Ethereum's programming language, Solidity. It can be used to deploy custom private or public blockchains as "subnets." Initially, Avalanche supported standard Solidity-based smart contracts through Ethereum virtual machines (EVMs). In the future, it is expected to support more rich and powerful innovative contract tools.

• Supports tools.
• Smart contracts that can be executed off-chain and verified on-chain.
• Smart contract for parallel execution. Smart contracts that do not work in the same state on any subnet of the Avalanche
• It can be run in parallel.

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As the popularity of Decentralised Finance (DeFi) proliferates, blockchain developers seek to provide new opportunities for investors using a novel structure of finance. Synthetic stocks, which grant users exposure to numerous assets while eliminating traditional barriers to entry, are among the latest forms of such innovation. In essence, synthetic assets refer to the tokenized clone of traditional financial assets. This ‘clone’ rests solely on a blockchain, however. Generally, synthetic assets can represent tech stocks, currencies, commodities, and even precious metals. Since they are blockchain-based, DeFi has become a home to these assets. In fact, the integration of blockchain technology which brings automation and removes the need for intermediaries is what makes synthetic assets so innovative. Courtesy of the blockchain, traders can enjoy exposure to traditional assets without the need to worry about the drawbacks a centralised platform brings. In addition, the decentralised nature of DeFi largely removes the troubles commonly emanated from regulatory bodies. Do Kwon, CEO and co-founder at Terraform Labs, the company behind Mirror Protocol, emphasised the nature of the quickly developing space:

“DeFi is so powerful in unlocking financial services for disenfranchised people around the world. It’s better to move fast and break things.Waiting for fragmented regulatory frameworks to crystallise before innovating is counterintuitive.”

How Synthetic Assets Work

Similar to derivatives in traditional finance, synthetic assets are digital assets with their price pegged to other real-world assets—such as TSLA or AAPL. Also referred to as “synths,” these assets track and provide the returns of traditional assets without requiring access to the real-world asset. 

Since synthetic stocks are derivatives, their value is derived from an underlying asset through smart contracts. Therefore, one can use these assets to trade the movement of price and value of traditional assets.Synthetic assets are typically created in the form of ERC-20 smart contracts that run on the Ethereum blockchain. They are different from options and other forms of traditional derivatives in that they tokenize the relationship between the derivative product and the underlying asset. 

On the other hand, traditional derivatives are financial contracts that create terms for an asset and its price. This allows DeFi users to leverage synthetic assets in the use of various trading strategies. For instance, hedging, which is a popular strategy in binary options trading, allows users to offset losses and manage risks by taking positions in derivatives. Such strategies are also used in DeFi's world of synthetic assets.

Advantages of Synthetic Assets

Synthetic assets carry a number of unique advantages. While there are no specific citizenship requirements to participate in the stock market, there are certain needs that investors must satisfy. Non-US persons must provide identification documents, pass Know Your Customer (KYC) screening, and comply with a number of laws that are intended to protect US interests. 

However, synthetic assets feasibly provide investors of any location or jurisdiction exposure to the price action of stocks, commodities, and currencies. To trade these tokens, users would hardly need any of the requirements to enter the US equities market. This makes synthetic assets a favourable alternative for foreign investors experiencing barriers to entry. Moreover, synthetic assets are openly tradeable and transferable, meaning anyone can send and receive them using standard crypto wallets. The only need is access to the internet and a bit of technical know-how. Since DeFi is always on, synthetic tokens can be traded 24/7. This is in great contrast to traditional markets, where trading is limited to specific days and specific hours.

In addition, with synthetic assets, there are no central party restrictions or risks. This is in stark contrast to the recent reddit-fueled GME drama when thousands of retail investors were unable to sell select securities due to restrictions imposed by stock brokers such as Robinhood. In such cases, these controlling parties can halt or even execute trades—keeping their primary interest in mind, without prioritising the trader.

Disadvantages of Synthetic Assets

Probably the most noticeable drawback of these tokens is that they never grant ownership of the underlying asset. A trader can earn profit and get exposure to the price of an asset, but this is merely a representation of the actual real-world asset. Therefore, synthetic assets holders do not obtain shareholder rights, votes, or access to dividends (if applicable).In addition, at times, scalability might also become an issue since DeFi is largely in an experimental phase. When minting synthetic assets, users should strive to choose the most suitable blockchain.

Despite being powerful, Ethereum is still prone to scaling issues and network congestion. Though they are typically much faster, transactions can take up to four hours to process via Ethereum, with average transaction fees breaching $20 throughout a number of days in early 2021. This is in stark contrast to the traditional payments world where credit card payments are facilitated seamlessly, showing the adolescent state that blockchain technology continues to remain in.

Lastly, DeFi is very vulnerable to hacks and exploits. Despite disrupting legacy finance, decentralised finance is still in the preliminary stages. In other words, no matter how cautious a project might be, a single breach can lead to the loss of all funds. One recent hacker stole more than $600 million in digital assets—though they were later returned as the “white hat” hacker prioritised the development of the network over his own riches.

Still, all of this is also true with synthetic stocks, which are—after all—a DeFi project.

Popular Synthetic Protocols

The most popular synthetic protocol in terms of total value locked is Synthetix, with over $1.8 billion in total value locked. Synthetix, which is the biggest derivatives protocol on the Ethereum blockchain, was the first project to introduce synthetic assets and bring this innovation to DeFi.

Synthetix reflects assets in the form of “sAssets” on the blockchain. As of now, the platform supports over 30 synths which range from cryptocurrencies, fiat currencies, indexes, and commodities like gold. The project also aims to add synthetic DeFi tokens for popular protocols like Aave, Uniswap, Polkadot, and Compound to its list of offerings.Following Synthetix, the second most popular synthetic asset protocol is Mirror, with over $1.7 billion in TVL. Mirror Protocol, which aims to grant everyone intuitive access to global markets, mirrors traditional assets in the form of “mAssets.”

These mAssets are a representation of the real-world asset that is pegged at a 1:1 ratio. Currently, the protocol reflects 14 real-world stocks on the blockchain. These tokenized assets include mTSLA, mTWTR, mNFLX, mAAPL, mAMZN, mGOOGL, mMSFT, and more. Other more prominent synthetic asset protocols include Uma, DAFI, and DEUS. Each of these projects offers a range of different synths, including stocks, currencies, commodities, and more. 

Conclusion

While there are many advantages to synthetic assets, there are also many downfalls and risks. Perhaps the most likely user of synthetic assets would include an individual who faces significant trouble when trying to access traditional securities through a broker such as Robinhood. For the investors who do not face such barriers to entry, it will likely take some time before the benefits of synthetic assets outweigh their risks—which are not entirely present in the traditional financial realm.

Shane Neagle explores what DeFi is and what it means for the future of the financial services sector.

Throughout humanity's long history, there were not that many thresholds after which nothing remained the same. The first major threshold represented a shift from hunter-gathering to agriculture, which led to the formation of cities, inevitably leading to metallurgy and the industrial revolution. In turn, after each threshold has been crossed, we have seen greater acceleration of innovation and economic growth.

Our modern era has been marked by the most important threshold of them all – digitisation – transforming real word assets into fungible and infinitely replicable bits. As a result, a book can be almost instantaneously downloaded at the speed of light to whoever needs it, effectively for free. This alone represents a far cry from the revolutionary Gutenberg printing press.

However, the world of finance has been missing the key ingredient to fully undergo digitization. Having electronic payment systems to move around representations of money is one thing, but having natively digital money is altogether another problem. One that many believe has been solved by the pseudonymous Satoshi Nakamoto, who ushered in blockchain technology manifested through the world’s first cryptocurrency – Bitcoin (BTC).

Blockchain Tech as a Digital Recreation of Money

Before blockchain came along in 2009, what would it have meant to digitise money? How could it retain value without being attached to some externality? We measure value with money because it is fungible, but how would we make money digital, fungible, and incorruptible? Otherwise, a string of numbers as a digital code would fail to render any meaning, or value.

Blockchain provides those boundaries that wall off potential corruptibility by relying on a decentralized digital record. Spread across a network of computers, blocks represent records of transaction, cryptographically (SHA-256 encryption) linked into chains. Therefore, when a single block is added – transaction conducted - it has to be verified across a majority of the network of thousands of computers holding the complete blockchain ledger.

In turn, every transaction is traceable. Most importantly, with constant verification of the entire network by Bitcoin miners, it is virtually impossible to be hacked. If someone generates a fake transaction, it would fail to generate a solvable hash, which would reveal it to miners. Although this has the effect of consuming electricity comparable to Argentina, it simultaneously made it so that Bitcoin grew to over $1 trillion in market capitalisation, as a leaderless, decentralised, unassailable and deflationary digital money, aka “digital gold”.

Bitcoin (BTC) price over one year, March 2020 - March 2021. (Source: TradingView)

Decentralised Finance as the Final Piece of the Digital Money Puzzle

Bitcoin, as a native digital currency, turned into a massively successful proof of concept. It continues to onboard institutional investors, from MicroStrategy to Tesla, both as a hedge against inflation and as a payment method. However, Bitcoin still exists squeezed within a centralised financial system, dependent on the on/off ramp of fiat currency.

What if the entire financial infrastructure, from banks to clearinghouses and exchanges, can also be digitised in a decentralised manner? Although blockchain technology made digital money possible, not all blockchains are created equal. Bitcoin’s blockchain was designed as secure and conservative, while others are more flexible.

Ethereum is one of them, launched in 2015 by Vitalik Buterin. While Ethereum’s native cryptocurrency (token) – ETH – doesn’t have a hard cap supply like Bitcoin, its value proposition is in utility. Thanks to its programmable blockchain, Ethereum hosts almost the entirety of dApps – smart contracts that are executed when conditions are triggered. This makes it possible to create blockchain games, NFT marketplaces, decentralized exchanges (DEX), and most importantly – DeFi – Decentralised Finance.

Total locked value (TLV) in DeFi, as of March 22, is $43.35 billion. (Source: DeFipulse.com)

Digital Recreation of Financial Products and Services

The scandal involving Citadel hedge fund and Robinhood trading app demonstrated in no uncertain terms the foibles of a financial system dependent on intermediaries.

• Robinhood is free, in large part, because it sells its order flow to hedge funds.
• Citadel constitutes a major source of income for Robinhood.
• Robinhood intercepts the trading of GameStop (GME) stock at the same time as retail investors short squeezed Citadel, most of which were using Robinhood as a “democratising” stock trading app.

Whether you want to trade with large market cap blue-chip stocks or dubious stocks like GME, such a system doesn’t inspire confidence if its underlying mechanisms can be upended with a pulling of hidden levers. Thanks to smart contracts - dApps - decentralised finance eliminates such risks. This means that you can engage in:

• Earning interest rates by lending staked tokens – Yield Farming. (Maker, Compound)
• Borrow assets against a collateral.
• Swap cryptocurrencies on decentralized exchanges. (Uniswap)
• Trade in non-fungible tokens (NFTs) – artworks and digital collectibles.

Alongside smart contracts, the underlying constructs powering DeFi are:

• · Automated Market Makers (AMMs) – As you must be aware, market makers in traditional, centralised finance provide multiple functions – providing liquidity, price stability and serving as sellers and buyers. In turn, market makers gain profits from ask-bid spreads, ending up oiling the entire financial market. In DeFi, AMMs use liquidity pools instead of hedge funds and large exchanges like NYSE.
• · Liquidity Providers (LPs) – smart contracts that act instead of hedge funds and exchanges by using liquidity pools. Any trader who stakes their cryptocurrency into a liquidity pool becomes a liquidity provider. In turn, they gain interest rates based on the stake of locked assets, which generates so-called ‘Yield Farming’.

Moreover, DeFi no longer presents an isolated system reserved for altcoins. The defining trait of DeFi is constant innovation, befitting such advanced digital technology. Just last month, the Synthetix platform made it possible to connect traditional assets like stocks and equities to the DeFi ecosystem. In the coming months, you will start to hear more about such assets - synths or synthetic stocks.

The growth of Bitcoin (BTC) is accompanied by many utility altcoins serving DeFi. (Source: TradingView)

Such bridging assets means that one could start trading with stocks on a DeFi protocol, and even engage in shorting. This was made possible by Chainlink (LINK) – a decentralised oracle protocol that feeds smart contracts with off-blockchain data, including those from the banking infrastructure and stock markets.

DeFi Shortcomings and Outlook

Given that DeFi exploded in value since last summer, it would be more accurate to frame DeFi’s current flaws as birthing pains. As you would guess, much of it stems from security issues – hackings and exploits. CipherTrace estimated that the DeFi market lost $2.7 billion last year due security breaches.

This largely originates from Ethereum’s flexibility as a programmable blockchain. Like smart contracts, it is entirely open-source, which is good for the growth of the space as it allows viable alternatives to emerge, Polkadot being one of the more rapidly growing ones. Although all major smart contracts are regularly audited by professional security companies, they too can miss exploits, as we saw with Yearn.Finance.

However, that doesn’t mean that insurance too cannot be decentralised. Indeed, such solutions are already in full swing: Nsure.Network, CDx, Cook Protocol, Etherisc, and the most popular one so far – Nexus Mutual.

Outside of these technical issues, DeFi has all it takes to fully tokenize and decentralize the world’s financial system if it is allowed to evolve. This may collide with governmental interests, but if we take into account 1.7 billion unbanked adults, and the growing threat of deplatforming in the developed world, this should serve as a strong force to drive DeFi across the new threshold.