Whatever your opinion is on cryptocurrencies — whether you’re a dyed-in-the-wool fanatic to a utter sceptic — the fact remains that these digital assets are becoming more valuable and impossible to ignore. Blockchain technology coupled with cryptocurrencies are creating new industries and one of these new industries is decentralised finance or DeFi.
DeFi is short for ‘decentralised finance’, an umbrella term for a variety of financial applications in cryptocurrency geared toward disrupting financial intermediaries.
It’s an entirely new digital-only and fully automated financial system, which is happening completely outside the traditional financial system.
Bitcoin and many other digital-native assets stand out from legacy digital payment methods, such as those run by Visa and PayPal, in that they remove all go-betweens from transactions. When you pay with a credit card for coffee at a cafe, a financial institution sits between you and the business, with control over the transaction, retaining the authority to stop or pause it and record it in its private ledger. With bitcoin, those institutions are cut out of the picture.
Direct purchases aren’t the only type of transaction or contract overseen by big companies – financial applications such as loans, insurance, crowdfunding, derivatives, betting and more are also in their control.
Cutting out go-betweens from all kinds of transactions is one of the primary advantages of DeFi.
Before it was commonly known as decentralised finance, the idea of DeFi was often called ‘open finance’.
DeFi has exploded over the last few years. The sector enables anyone to lend, borrow, earn interest or take out insurance without a bank clerk rummaging through your income and expenses statements and demanding box-loads of documents. DeFi applications are open to everyone and rely on cryptography, blockchain and code in the form of applications (just like what you have on your mobile phone).
Most DeFi projects are built on the Ethereum blockchain, the world’s second-largest cryptocurrency platform, which allows for the development of thousands of applications allowing users to lend, borrow, trade, take out insurance, and earn interest. You can purchase stablecoins such as USDC, backed 1:1 with the US dollar, which can be held securely outside the banking system. You can also earn interest on these assets using DeFi platforms.
“Bitcoin was the first step in the move towards a decentralised money system. No government or central bank has any control over the issuance or processing of bitcoin, which takes place on thousands of computers distributed across the globe. It recognises no national borders and has proven itself immune to hacking,” says Sean Sanders, CEO and founder of crypto investment platform Revix.
Here are some of the ways people are engaging with DeFi today:
- Lending: Lend out your crypto and earn interest and rewards every minute – not once per month.
- Getting a loan: Obtain a loan instantly without filling in paperwork, including extremely short-term ‘flash loans’ that traditional financial institutions don’t offer.
- Trading: Make peer-to-peer trades of certain crypto assets — as if you could buy and sell stocks without any kind of brokerage.
- Saving for the future: Put some of your crypto into savings account alternatives and earn better interest rates than you’d typically get from a bank.
- Buying derivatives: Make long or short bets on certain assets. Think of these as the crypto version of stock options or futures contracts.
“As bitcoin took off over the last decade, centralised crypto exchanges arose to allow for the purchasing, sale and custody of cryptocurrencies like bitcoin. Centralised exchanges act like companies and have owners and stakeholders, and the recent events at stock trading platform Robinhood highlights a glaring deficiency in this kind of exchange ownership model – one that DeFi eliminates,” adds Sanders.
In the case of Robinhood, retail traders ganged up on hedge funds that were shorting the New York Stock Exchange-listed GameStop share and drove up the price, forcing hedge funds to close their positions with billion-dollar losses.
Robinhood, a US trading application, then restricted the ability of its retail clients to trade in this share. This would be near impossible on a decentralised exchange.
The value of assets transacted through DeFi has grown from $2.2 billion (R32 billion) in March 2020 to over $68 billion (R1 trillion) today. That’s a growth of 31 000% in little over a year.
The traditional financial system is inefficient and has inherent risks that produce catastrophes like Lehman Brothers (which collapsed in 2008 after gambling in high-risk financial markets). This is because it relies on an antiquated system for managing information together with settling and clearing trades. DeFi eliminates or reduces many of these risks, particularly counterparty risk, since two parties are transacting directly with each other without an intermediary. The terms of the financial transaction are not written into a legal contract but into computer code. There is no room for interpretation or legal argument.
The decision of trading platform Robinhood to restrict its clients trading in GameStop – seen by many as an attempt by the Wall Street heavyweights to protect each other – will accelerate the development of DeFi where there is no centralised exchange capable of changing the rules mid-stream.
Centralised exchanges such as the JSE rely on intermediaries (brokers) that add high fees and friction to trading. And, as we have seen with Robinhood, traders (and perhaps even nations) can be blocked from participating in financial transactions.
How to benefit from this explosive growth in DeFi
Cryptocurrencies such as Ether (which is the currency linked to the Ethereum blockchain), Cardano and Polkadot all provide direct exposure to the DeFi sector.
Through the Revix crypto investment platform, you can get exposure to DeFi-linked cryptos in several ways:
- Purchase the Smart Contract Bundle which tracks those cryptocurrencies that aim to offer an open-source, public network without any downtime, fraud, control or interference from third parties. Smart Contracts use a blockchain to allow peer-to-peer transactions without the need for third party verification. This bundle comprises cryptocurrencies like Ether that enable developers to build applications on top of their blockchains, much like how developers build mobile apps on top of the Apple mobile iOS operating system. The cryptos in this bundle include Ethereum, Cardano, Tron, Neo, and EOS.
- Revix also offers a Payment Bundle, which provides exposure to the five largest payment-focused cryptocurrencies looking to compete with government-issued fiat currencies (like the rand or British pound we have today) and to challenge the fiat currencies to make digital payments cheaper, faster and more global. These cryptos include bitcoin (BTC), Ripple (XRP), Litecoin (LTC), Bitcoin Cash (BCH) and Stellar (XLM). The use of these coins will rise exponentially as DeFi takes off.
- The Top 10 Bundle available through Revix spreads your investment equally over the 10 largest cryptocurrencies – which covers about 85% of the crypto market when measured by market capitalisation – with each having a 10% weighting. By default, you are buying the 10 biggest success stories in the crypto space. The weightings are adjusted monthly to ensure no crypto exceeds a 10% weighting, and that can be a major advantage, as other constituents of the bundle (like Ether, Chainlink, Cardano and Polkadot) have outperformed bitcoin’s amazing 300%-plus rise last year.
You can also buy and sell Bitcoin, Ether, USDC (a ‘stable coin’ fully backed by the US dollar) and a gold token called PAX Gold that is fully backed by physical gold bars through Revix’s online platform.
“I’ve always thought this digital asset space is huge – and it’s not just bitcoin – because there are going to be different applications for different things. If you’re looking to capitalise on trends shaping ‘the new normal’, then consider investing in assets that are global, generational, and digital – cryptocurrencies offer just that,” says Sanders.
Sanders describes a future where everything from contractual agreements to the payment of taxes is built into the plumbing that directly connects individuals and enterprises in a wide range of new kinds of business relationships.
Revix charges no monthly account- or subscription fees, but rather a simple 1% transaction fee for both buys and sells and a 0.17% per month rebalancing fee (which amounts to 2.04% a year) on the total bundle value held (this fee is not levied on single cryptocurrencies like bitcoin or PAX gold). These fees can be reduced by 50% by taking part in their rewards programme – the first Bitcoin based rewards programme of its kind in Africa.
Brought to you by Revix.
For more information, visit Revix.
This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose, and before investing please take into consideration your level of experience and investment objectives, and seek independent financial advice if necessary.