DeFi began life as a MEME

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Rossco Paddison and I were bus buddies in Macau in a time before COVID. We were both speaking at an event on Decentralized Finance (DeFi) – a concept that Rossco was already deeply enmeshed with, and while a superb conference, I did not fall down the rabbit hole at that time. We were bus buddies as we went on a whistle stop tourist jaunt across the island with our fellow speaker and it was enough to form a friendship but not enough to make me pay particular notice to DeFi. It took the summer of 2020, that rotting summer filled with COVID, lockdowns and pandemics, for DeFi to come back into focus for me.

And the summer, as with everything else in 2020, was crazy. DeFi exploded onto the scene with billions of dollars traveling into different start-ups, called funny names (typically food related) and introducing the rapt cryptosphere to a whole range of new terms including yield farming, impermanent loss and flash loans. The last particularly fascinated me with the promise of huge borrowing, massive arbitrage opportunities, no collateral and all completed with a single block – or else it never happened. It also attracted scammers who were able to melt away liquidity pools or take advantage of unaudited code loopholes. It was like ICOs on steroids.

On our call today Rossco says people say the DeFi summer is over but according to him, it’s most definitely not.

“Crypto folk have this tendency to jump from one hot mess to the next. To say that the DeFi summer is over is to misunderstand the technology itself. DeFi is literally unstoppable with lending and borrowing constantly growing – the market cap in DeFi has 2x since the summer was over. But sometimes the Twittersphere can dictate the crypto narrative, unfortunately.”

Rossco got into DeFi at the start of 2019 when there were only a couple of thousand active people in the space. Essentially it began as a meme to explain non-custodial borrowing and lending but where the owner of the coins still held the keys and still controlled the process.

DeFi began life as meme, is that art copying life or vice versa?

“It’s not new but builds on the smart contracts of Ethereum. DeFi rolls of the tongue better than Ethereum Smart Contracts.”

Maker DAO led the way when people put up Ethereum as collateral to create a decentralized stable dollar known as DAI. You then had to put up 150% of every stable dollar you wanted to mint inside a smart contract. From that people could draw down DAI against this loan they had created called a Collateralized Debt Position or CDP.

This meant that each of the DAI circulated was 150% backed by Ethereum.

Traders who wanted to go long on the Ethereum asset were very active. If someone had a lot of crypto assets but didn’t want to sell them, they could draw down $30,000 to buy a new car using DAI and without touching the assets. If Ethereum went up, they repaid the loan and still kept the assets.

“The tech is super simple – it’s just loans and interest.”

Uniswap is a key milestone in the popularity of DeFi. Before Uniswap, there were different types of decentralized exchanges such as IDEX or DDEX. People would go to the platform, deposit the funds in the smart contract, transact within the contract and could still pull their funds out. People still had their keys so it was better than a centralized exchange but it was still step-heavy.

“Uniswap on the other hand has two-sided liquidity pools with people depositing their Ethereum or DAI and taking a small fee from transactions. It’s all possible within one transaction, it’s brilliant.

“Another protocol to benefit from Uniswap’s approach is Compound which is an automated money maker with people who want to borrow or to lend.  Compound fixes an interest rate and matches the two halves.  So people can earn a variable rate if they wish but as users of the Compound protocol can also earn Comp token which is the governance token and is worth a decent amount.”

Why this is important is that these governance tokens on an increasing number of platforms are a way of minting new coins without the SEC getting involved. It’s rewarding users of the protocols in the same way that miners get rewarded in bitcoin.

A new way to mint coins outside of an ICO

“And that is what kicked off the DeFi Summer – it was a blindingly clever way to mint and distribute new tokens that were valuable.”

Of course, on the flip side, people watching the explosion in DeFi cottoned on to the appeal of the branding. Many projects jumped on the bandwagon and launched over the summer and some had nothing to do with DeFi but they used same branding to stick a label on their wares anyway.

“That’s one of the main reasons I am so keen on education. To survive the wild wild west you need to understand what is going on – you don’t need to be in the know or mix with the right people, but you do need to pay attention.”

Rossco was originally working on Mosendo, a payments platform which had a DeFi infrastructure under the hood where people earned interest on their balance. Earlier this year he pivoted to an experiment with a platform called GrowUSD which is essentially a lending and borrowing platform where you can earn a solid 8% on DAI deposits.

“What’s interesting about GrowUSD is that we built in a single tier affiliate program so that anyone can register a page on forward slash your name. So anyone depositing money there will earn 8% but you will also earn around 0.8 per annum on their deposits. And there is no security risk as it’s all done in a smart contract.”

Of course, the other clever approach is to be able to offer interest as high as 8% in a zero interest environment. This is done through an infrastructure partner called Open Protocol which provides the interest which is generated through multiple real world assets such as real estates and shares as well as crypto assets.

“DeFi is the ultimate key to unlock real world assets. Imagine being able to use a DeFi loan to pull cash out of a domestic house – now that’s where it gets interesting. Naturally it’ll be different in each jurisdiction.”

Rossco points out quite reasonably that for most people their house is their biggest and yet most illiquid asset.

“And if you look around your community there is so much liquidity locked into all those houses, so much opportunity.”

Right now, Rossco is concentrating on GrowUSD while it is still in beta. He hopes to launch fully in the January or February, but his focus is on user acquisition. He sees it as a long term play, an crypto alternative to wealth management services with a long tail of investment over the years.

“We don’t need to the first or even the best, but to offer a consistent product that looks after its users. We need to be patient.”

First published on VOICE