I’m someone who follows Ethereum (CCC:ETH-USD) and Bitcoin (CCC:BTC-USD) like the casual sports fan who follows the NFL. You know when the Super Bowl is, but beyond that, you really can’t name too many of the players on the field.
Source: Shutterstock
And that’s okay. There are only so many hours in the day.
No, if it weren’t for the concept of decentralized finance, I’d have absolutely no interest in the world’s second-largest cryptocurrency. None.
Not even after my InvestorPlace colleague, Sarah Smith, recently discussed how high it could go after hitting $1,420 on Jan. 19.
However, in Sarah’s article, she mentioned the notion that decentralized finance has entered a new era.
If so, that’s something I can wrap my arms around. Here’s why.
What Decentralized Finance Means to Me
Smith’s article references CoinDesk contributor William Foxley’s ideas on the subject. I checked them out for myself.
“Decentralized finance (DeFi) is widely regarded as the best Ethereum use case to date. DeFi markets enable permissionless and automated lending, trading and borrowing to anyone with an internet connection,” Foxley wrote on Jan. 19. “The market recently surpassed some $22 billion in total value locked (TVL) – a metric similar to assets under management (AUM).”
That’s good to know.
But what I want to know is what real-world examples of decentralized finance exist as a result of ethereum that wouldn’t otherwise have seen the light of day? I don’t know. As I said, I’m a casual observer.
So, I looked to American Banker for answers.
Where Is DeFi Headed?
“This is where DeFi is going: Instead of proving creditworthiness to a bank to obtain a loan, customers can use cryptocurrency as collateral to borrow money through the set terms of a smart contract,” American Banker contributor Penny Crosman wrote on Jan. 4.
That’s great. But couldn’t I do the same thing if I had $25,000 cash in my bank account and got a loan for $25,000 secured against the cash in my account?
Crosman mentions examples such as Uniswap, MakerDAO, and Compound as examples of pure decentralized finance.
These are good examples, but I bet anyone who’s not fluent in blockchain-speak will not be able to explain what each of them does to fulfill their DeFi mandate. Compound’s site appears to be written in Sanskrit for all I know.
To me, DeFi means that I can buy stocks anywhere in the world using my ethereum cryptocurrency, eliminating the middleman (stockbroker, etc.).
“Eliminating middlemen and conducting financial transactions through a smart contract on a distributed ledger is an ideal, but in real life things break,” Cosman writes.
“Hackers have broken into smart contracts, and thieves gradually stole $450 million of bitcoin from the Mt. Gox exchange from 2011 to 2014. In traditional financial services, people in contact centers and branches make things right when fraud, errors or breakages occur.”
Assuming all the stakeholders involved in the buying and selling of stock agreed on how to rectify situations gone bad like the one above, I’m not sure ethereum’s true value will be realized.
A Forbes article from August 2018 provides me with some hope.
“Major current pain points, particularly in cross-border payments and trade finance, can be solved by blockchain-based solutions, which reduce the number of necessary intermediaries and are geographically agnostic,” Forbes contributor Eric Ervin wrote.
The Bottom Line on Ethereum
CoinDesk contributor Tanzeel Akhtar wrote in December about decentralized stock trading using the DeFi platform Injective Protocol and its Solstice V2 Network.
“Investing in stocks still remains inaccessible for billions of people worldwide while the existing platforms act as gatekeepers and suffer from technical challenges,” said Eric Chen, CEO of Injective Protocol.
Injective Protocol allows investors to trade on any derivative market without any restrictions. On Jan. 12, it launched Tesla (NASDAQ:TSLA) futures trading. It plans to add more stock futures in 2021.
CEO Eric Chen wrote a Jan. 2 blog post that explains Injective’s vision for the future.
“All of this is made possible on Injective with a simple user interface that enables the creation of complex derivative markets in seconds. By reducing the friction that exists to create avenues for individuals to exchange risk, we seek to make our global financial system more free, fair and efficient,” Chen writes.
As I stated in the intro, my interest in cryptocurrencies such as ethereum and bitcoin is limited.
However, what I’m reading regarding Injective Protocol’s work in stock trading has definitely piqued my interest. I, too, believe this is where the future is headed, with or without ethereum.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.