Will DeFi Put Wall Street Out of Business? Dimitri Berenzon recently tweeted About the various benefits of DeFi. Before reading about the benefits, let’s get to know a little bit about DeFi and Wall Street.
What is DeFi?
DeFi is a decentralized, global financial system built for the Internet age, providing an alternative to a system that is opaque, tightly controlled, and relies on decades-old infrastructure and processes. It gives you comprehensive financial management and visibility. It exposes you to the global markets and gives you currency and banking possibilities that are not available in your country.
Customers typically own and operate DeFi equipment, allowing anyone with an Internet connection to access financial services. The DeFi program has already managed billions of dollars in bitcoin, and this figure continues to grow.
Holders of various cryptocurrencies can use decentralized finance to: (a) earn interest by lending to liquidity pools that make loans to borrowers; and/or (b) borrow money by placing your cryptocurrency as security. Because lenders can earn significantly higher interest rates than traditional banks, DeFi is becoming a more attractive alternative to traditional markets such as Wall Street.
Interest rates range from 5 to 13 percent depending on the platform and token used. Lenders can also use their assets to bet on or against market volatility, which is a feature of cryptocurrency trading.
What is Wall Street?
Wall Street in the Manhattan borough of New York City is only a few blocks long and less than a mile wide, but its influence is felt all over the world. The name “Wall Street” was used to describe a small number of large independent brokerage firms that dominated the American investment business at the time.
However, since 2008, the distinction between investment banks and commercial banks has blurred, and Wall Street is now a collective term for the various parties involved in the American investment and financial industry. This includes the largest investment banks, commercial banks, hedge funds, mutual funds, asset management firms, insurance companies, etc.
Because it is the trading center for the world’s largest financial markets, Wall Street has a tremendous impact on the worldwide economy. The venerable New York Stock Exchange, the undisputed global leader in terms of average daily share trading volume and total market capitalization of its listed businesses, is located on Wall Street.
However, DeFi’s cost structure takes over Wall Street and puts it out of business! As Dmitry Berenzon explained in his tweet, let’s look at some of the benefits DeFi has on Wall Street.
The advantages of DeFi over traditional methods according to Dmitry Berenzon
- DeFi enables software economics for financial services. Traditional banks and fintechs are unable to achieve this because they are still built on obsolete railroads.
- What exactly is “software economics”? Making more copies available while making software is free is mostly a fixed-cost endeavor. In other words, there is no marginal cost for each additional user. As a result, software companies can now achieve unprecedented growth and profitability.
- Banks and fintechs do not have this luxury due to paperwork, manual processes, compliance expenses and other factors. Because financial services are smart contracts that live forever in the permissionless financial cloud, they are a non-issue for the DeFi protocol.
- In fact, the economics here are much better than in SaaS! While SaaS generates income, DeFi (and DApps in general) generates free cash flow as miners and validators pay for the infrastructure while users incur costs (in the form of gas).
Dmitry Berenzon also gave some examples in his tweets about how powerful this new paradigm is. Let’s look at them.
Things to note:
- The comparison isn’t really apples-to-apples.
- Cryptographic data is not always accurate (eg headcount taken from LinkedIn)
- In an effort to standardize the data, the data is for FY2020.
Paypal vs Ethereum in terms of payments
With 0.2 percent of the workforce, Ethereum was able to process 1.7x payment volume 26% of the time.
Uniswap vs Coinbase in terms of exchange
Uniswap processed 30% of Coinbase’s volume in 2020, consisting of 27% of manpower and 2.6 percent of venture capital funding.
Lending Club vs MakerDAO in Lending
After 6 years of operation, MakerDAO has turned a profit, while LendingClub is still losing money even after 15 years.
Some Other Ways DeFi’s Cost Structure Could Put Wall Street Out of Business
- Thanks to the effective use of cryptography and consensus techniques such as proof-of-work, blockchain has achieved true immutability. It is almost impossible to modify any record on the blockchain network.
- Immutability, in addition to the benefits of decentralization, provides a promising assurance of security. Not surprisingly, the immutability of the blockchain protects the integrity of the DeFi system when conducting financial transactions.
- Transparency is another key feature of DeFi, while immutability is critical to the DeFi landscape to ensure security. The cryptographic principles of the blockchain also ensure that information is valid only when verified as valid.
- DeFi has also been instrumental in the development of peer-to-peer lending and borrowing solutions. DeFi allows for a more efficient and simpler verification process in loan and lending applications.
- Tokenization is one of the most talked about concepts in the blockchain world at the moment. Ethereum enables broader smart contract capabilities, paving the way for issuance of crypto tokens. Tokens can help you achieve a variety of tasks. Real estate tokens may be able to help you gain partial ownership of tangible assets.
DeFi has accelerated its expansion in the first half of 2021, despite the recent turmoil and a major drop in May. The current trend of nuclear services and financial management increasingly reliant on technology, workflow management, and risk arbitrage for credit opportunities is reinforced by DeFi-based transaction banking. Permissionless access and greater emphasis on interoperability are two key qualities that DeFi brings to these developments.
There used to be a lot of businessmen on Wall Street. Stocks and bonds were bought and sold over the phone. They are now losing money on their trading operations and have laid off a large number of traders. This suggests that DeFi’s cost structure may be higher than Wall Street.
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