In 2020, we saw the Oracle of Omaha, Warren Buffett selling all his positions in banks that included; Goldman Sachs, JPMorgan Chase, Wells Fargo, and others.
Given that the banking sector of Dow Jones, Nasdaq, and S&P 500, all three remain under losses, negative 35% returns YTD, it makes sense that even Buffett has jumped the ship.
In the current environment of ultra-low interest rates, banks are struggling to remain profitable.
But while centralized financing is suffering, Decentralized Finance (DeFi) has emerged in the crypto market as the latest craze which is seeing explosive growth.
The banking sector is down about 25% YTD, and will likely bleed in the coming decade due to low interest rate. Meanwhile DeFi is up about 10x YTD.
If there’s a once-in-a-lifetime opportunity to switch career, I think it’s now.
— Qiao Wang (@QWQiao) August 19, 2020
The DeFi Boom
On January 1st, 2020, the total value locked in the DeFi sector was $680.9 million, which has now grown to $6.67 billion in just eight months.
The total market capitalization of the top 100 DeFi coins is close to touching $14 billion, as per CoinGecko. The biggest gainers of this sector this year include LEND (6,280%), REN (1,300%), KNC (835%), YFI (789%), LINK (650%), and SNX (480%).
The blockchain underpinning majority of the DeFi development, Ethereum is also up 209% YTD. Also, a record 4.6 million Ether are locked in these DeFi protocols along with 47.8k BTC.
“From a portfolio standpoint I want to be long the asset that is driving the market with real demand. ETH is a newer trade than the traditional trade of BTC vs central banks printing money,” said trader CryptoISO.
“Rocket Fuel” for DeFi Growth
The DeFi sector is seeing a new wave of financial experiments which is tokenizing everything from money, debt, mortgages, to insurance.
As Asheesh Birla, SVP of Product at Ripple notes, “We’re seeing a melding of the old world and new. It’s only a matter of time before banks offer custody services, acquire companies with those capabilities, and potentially even offer crypto lending as they see consumer interest in DeFi.”
Decentralized exchanges, with no central operator, in the crypto world, are already giving centralized exchanges a run for their money. Fiat-backed stablecoins have been providing the fiat on and off-ramps while enabling global consumers to access the USD without a bank account through the likes of Tether (USDT).
But within this sector, a new wave of Yield Farming is what is taking DeFi world by storm. It is basically serving as “rocket fuel” for the current growth cycle in DeFi, states Delphi Digital in its latest report.
Yield farming is generating the most returns on your crypto assets, and since people started chasing high yields, many ‘experiment” projects have cropped up in this really short period. It started with Compound and only grew from there to the likes of Yearn.Finance (YFI), Balancer, YAM.Finance, the Curve-Ren-Synthetix mix, and so much more.
— Alex (@classicmacro) August 20, 2020
But Not Without the Risks
As we reported, the skyrocketing Ethereum transaction fees are pricing out smaller layers and making DeFi increasingly a game of whales.
Another big question is: Are these governance DeFi tokens, that are at the heart of DeFi’s explosive growth, really that decentralized? According to the Token Daily report, the distribution of these tokens might not be that different from the ownership structure of JP Morgan or Bank of America.
For starters, the investors of these DeFi projects control a “disproportionately large amount of votes,” such as more than 13% of the voting power for Compound is controlled by the top 10 addresses.
Also, “In yield farming, funds and wealthy investors, aka whales, are maximizing their benefit/share of governance tokens using recursive provisioning of liquidity. This ultimately leads to a concentration of these tokens into the hands of a few players/farmers.”
Although with liquidity mining as with Yearn.Finance, a new dynamic of money distribution is being added; large gatekeepers still have a big influence on the protocol, which could be even more concentrated than the centralized options.
Moreover, all this craziness will inevitably invite “difficult legal questions and regulatory scrutiny,” said Jason Somensatto, senior counsel at 0x Labs. But in the end, he hopes, it will leave a “healthier ecosystem.”
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