Crypto and DeFi are two of the most talked-about topics in the financial world today. Crypto refers to the use of cryptography to secure transactions and control the creation of new units of currency. DeFi, short for decentralized finance, is a new way of conducting financial transactions that does not rely on central intermediaries like banks. Crypto and DeFi are often spoken about in tandem because they share a common goal: to provide a more efficient and democratic way of handling financial transactions.
Crypto companies and enthusiasts are always throwing unwarranted hype at any situation. Stock market is healthy, crypto is doing better. Stock market is sinking or inflation skyrocketing, it is the only way out. Those hyping crypto and DeFi want you to believe they always produce a profit, it’s as if the crypto winter and the failure of multiple exchanges and DeFi implementations in the last few months never happened! When Bloomberg, Coindesk, CoinTelegraph, Fortune, and The Motley Fool all provide good arguments for why DeFi is in deep trouble, maybe we shouldn’t be declaring it our savior? Not to pile on, but I also wrote about the technical issues around these topics months ago here and here. As to why CBDC might be needed despite the availability of stablecoins, maybe the $60B failure of TerraUSD (UST) four months rings a bell?
There has been much talk of central bank digital currencies (CBDCs), yet when we have deflationary stablecoins already in the ecosystem, whose value can be pegged to collaterals, such as other cryptocurrencies or even traditional assets, what is the real benefit of a CBDC? The whole idea of a stablecoin is to offer a crypto asset whose value isn’t prone to extreme volatility. Most stablecoins achieve this stability by pegging their value to a fiat currency, such as the U.S. dollar or a basket of assets, which could include fiat and cryptocurrencies.
Moreover, most stablecoin projects also incentivize people to stay invested in the ecosystem by offering up derivative versions of assets they have locked in liquidity pools, allowing investors to engage in other DeFi protocols even while their main assets remain locked. They can earn generous interest and still use derivatives to take our loans, or earn yield in other places, compounding their initial investments.
DeFi is providing new avenues for economic growth while also giving power back to every individual, not just the superrich. By not being pegged to a nation-state currency and instead the broader development of the crypto-powered economy, DeFi protocols can offer generous incentives to save, earn and borrow with very little initial investment capital needed.
Mercator Advisory Group has written a viewpoint discussing the practical uses for crypto for corporate banking and payments.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group