People Dramatically Underestimate The Power Of DeFi; A Lesson From AirBNB

People Dramatically Underestimate The Power Of DeFi; A Lesson From AirBNB

In the past few months, it’s become cool — even among crypto skeptics — to have a positive view of decentralized finance (DeFI).

DeFi is, of course, the catch-all term for crypto-enabled apps that use software in an attempt to disrupt the traditional financial services industry. And recently, the coverage from the mainstream media has been remarkably positive.

  • The New York Times earlier this month: “An alternative financial world is springing up around the traditional banking industry.”
  • The Economist in September: “[T]he rise of an ecosystem of financial services, known as decentralised finance, or ‘DeFi,’ deserves sober consideration. It has the potential to rewire how the financial system works, with all the promise and perils that entails.”
  • As an early mover to the space — my company launched the world’s first DeFi crypto index fund in February of this year — it’s wonderful to see popular news outlets wake up to DeFi’s potential.

    But so far, the mainstream media has missed half the story. To really understand the full power of DeFi, you have to think about Airbnb .

    The First Half of the DeFi Story: Streamlined Finance

    Most mainstream articles about DeFi use a project called Uniswap (UNI) to explain what DeFi is. It’s easy to see why: Uniswap is the largest DeFi application today by market capitalization, and also one of the easiest to understand.

    Uniswap is a “decentralized crypto exchange.” Investors can use Uniswap to trade one crypto asset for another: BTC for ETH, ETH for USDC, and so on. In that way, it functions a lot like Coinbase, the publicly traded crypto brokerage giant that boasts more than 60 million customers.

    The difference is, Uniswap is not a company. It has no employees, no offices, and no CEO.

    Nonetheless, it’s still a very big deal. Last month, investors traded more than $60 billion of crypto assets on the Uniswap platform. That compares to about $150 billion on Coinbase, the largest traditional spot-crypto-trading platform (with more than 1,200 employees). This blows people’s minds: Imagine doing 40% of the trading volume on Coinbase without any overhead!

    It’s easy to look at Uniswap and imagine a financial future without the overpaid middlemen, bankers, and CEOs we all love to hate. This is the vision the mainstream media falls in love with.

    As big and as beautiful as this view is, however, it misses a huge part of the story.

    The Power of Two-Sided Markets: Airbnb, Uber , and Twitter

    Over the past two decades, some of the most successful companies in the world have been those that have disrupted well-established markets by unlocking large, new sources of supply.

    Airbnb, for instance, opened up millions of new rooms for lodging and disrupted the hotel market. Uber created a two-sided market for ridesharing and disrupted the taxi industry. Twitter created a two-sided market for information and disrupted the media ecosystem.

    In each of these examples, people with something valuable — a spare room, a willingness to drive, or an eyewitness account of the news — didn’t have an easy way to bring that value to the market … until they did.

    DeFi does this for finance.

    With Uniswap, for instance, you can trade Ethereum for USDC, taking liquidity from the system. But you can also supply liquidity by, say, offering to trade UDSC for Ethereum at certain prices. And if you supply liquidity to the service, you earn fees when people trade (0.30% of every trade).

    This is a major change.

    If you think about how the traditional stock market works, most investors buy a stock and then … nothing. It sits in their brokerage account, sometimes for years. Liquidity in the stock market is supplied by a relatively small number of institutional market makers and high-frequency traders — extremely profitable private companies like Jane Street or Susquehanna.

    With Uniswap, everyone can be a market maker. That includes firms like the Jane Streets and Susquehannas of the world. But it also means people like you and me. The result? More liquidity across vastly more assets.

    Over the years, financial institutions have been extremely resistant to disruption. A primary reason is that in finance there are major advantages to having scale. The New York Stock Exchange, for example, has been America’s largest stock exchange for 250 years in large part because its size gives it a liquidity advantage. DeFi flips this by opening up massive new sources of supply.

    (And not just for trading: On lending platforms like Aave, you can borrow crypto assets and pay interest, or you can lend crypto assets and earn interest. On insurance platforms like Nexus Mutual, you can pay for insurance against technical risks if you are using other DeFi applications, or supply insurance against those risks and receive fees.)

    In other words, yeah, it’s cool that Uniswap did $60 billion of trading volume last month without any employees. But what’s really cool is that the liquidity on the platform was supplied by thousands and thousands of users scattered around the world.

    For investing, efficiency gains are an incremental improvement. Unlocking new supply is a game changer.

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