CeFi, DeFi, or a DAO Platform — Who is the Fastest and Steadiest Horse in 2021？
In an arena set with negative real interest rates, fund managers and retail investors are racing to the fastest horse under the profit-maximizing strategy.
Paul Tudor Jones wrote in a note he titled “the Great Monetary Inflation”, “The best profit-maximizing strategy is to own the fastest horse,” the founder of Tudor Investment Corp added, “If I am forced to forecast, my bet is it will be Bitcoin.”
The DeFi Summer picked up its momentum from earlier this year and boomed upon ETH 2.0 mainet launch.
According to Debank, total value locked in DeFi smart contracts reached $18.34 Billion today. Minus the duplicated assets, the true value locked reached $12.41 Billion.
The numbers varies slightly with DeFi Pulse. According to them, 14.68 billion is accrued on DeFi platforms as of Dec. 14th. Regardless, DeFi has performed a dramatic surge from around $650 million earlier this year. People are using these platforms for investing, loans, savings accounts, and checking accounts services.
DeFi and its programmable protocols allow more forms of financing tools to be invented. For example:
yield farm — gaining reward tokens by providing liquidity (a stablecoin) to a pool.
flash loans — borrow a loan, using profitable applications like arbitrage on Dex, and repay the loan within one transaction (within one block).
DeFi, the decentralized financial system, is an umbrella term describing the blockchain-enabled platforms that deliver derivative services giving the user total assets ownership and control to the capital flow.
As opposed to DeFi, there is CeFi. The term CeFi, centralized finance is used to describe emerging platforms that offer loans or interests for depositing. It encompasses crypto exchanges or investment platforms that imitates the legacy financial system.
The Macroeconomy Context
In a world where the US sets the interest rate at 0, and banks in Europe have an interest rate below 0 since 2014, CeFi and DeFi platforms have attracted capital migration for the high yield.
Fed interest rates gradually affect savings account interest rates. As the Fed’s rate, or the rate for interbank short-term loans lowers, financial institutions tend to pay less interest on high-yield savings accounts to protect profits.
Not only that savings accounts in the legacy banks are generating poor interests, but the dollar and other currencies are also facing a possibility of inflation in the next two decades. As opposed to that, Bitcoin is hard money. As well put by a macro observer and crypto investor:
The lowering yield in traditional finance is a major reason for the DeFi summer. The programmable money and finance built on Ethereum generate a far higher yield, but of course with a higher risk.
Financial Security vs. Freedom vs. High Yield
DeFi Aggregator — a Path on Solving the Trilemma
These three parameters seem to behave like the three lines in an impossible triangle. But can we have it all?
Systematic Sustainability from 2020 to 2040？
When we talk about financial security, we are not only talking about phishing attacks on your bank account. We are also observing the stability and sustainability of the legacy financial system as well as its impact on the Mainstreet.
In history, a sudden dramatic money multiply happens before a war to fund the war. It results in wealth transfer (the Mystery of Banking by Murray Rothbard). Though purchasing debt through the repo market took place of federal reserve banking, but notice the direct relation between money printing and militant expansion throughout history.
The gap between rich and poor widens, the debt to GDP ratio already surpassed the historical high from around World World II, and the apparent rise of populism — all three indexes point out, the system is fragile.
Unliked in the 1930s, Fed reacted fast this time in dropping the stimulus plan to delay the debt crisis. However, built as an engine of inflation (make money supply elastic) and flagship of financial control, it doesn’t have many tools outside of the box.
Nine trillion is not enough to quench the dollar shortage when the economy hit the wall in Covid. The debt bubble is piling up even higher. This monetary policy may go on to overshadow the next decade.
Debug the System
When the cypherpunks investigate the banking and financial system and break down the concept of centralization, it takes several meanings:
- Money Creation: how the money is created through fractional reserve banking (before the 1990s, now modern money creation is through Fed purchasing securities using “new money” in the overnight money markets. )
- Custodian: this is linked with money creation. There is a scarcity built into money creation. There is never enough money stored in the bank. The money in one person’s bank account is loaned out, invested by the bank on someone else; a dollar bill flowing in circulation multiplies its value in the economy.
- Control of Capital Flow: sometimes for liquidity reasons, investors are told that they have to give a notice 40 hours in advance to move a sum of money. Sometimes there are rules on delaying transactions due to security reasons. Also, the commonly known, capital control in remittance — the rules vary from country to country.
CeFi are the banks and stock markets in the crypto space.
- Easy onboarding. The UI for end-users resembles that of the legacy financial platforms.
- Custodian: uses a combination of the hot and cold wallet, managed by the company.
- Market-Making Mechanism: high-frequency trading bots written by the company. (order book data on volume and spread is stored in center server)
- Transfer of funds: Bitcoin buyers in Robinhood found out that they could not send the bitcoin out to an address. They could only sell it for dollars and transfer the fund. When they do that, it generates a taxable event.
This is a disadvantage. DeFi apps are easier to use for crypto investments. The crypto natives who work in this field use DeFi. They like that the DeFi products offer much more flexibility in functionality.
DeFi runs parallel to this legacy financial infrastructure.
- Storage: the capital is locked in smart contracts in a decentralized network.
- Liquidity: this is essential to support its high yield. Usually, the deposit interests are covered by the collaterals or interests generated from the loans.
DADA Mining Funds and DeFi Aggregator
A DeFi-CeFi Hybrid
- KYC and strict auditing on the fund managers: DADA absorbed this process from CeFi, e.g. We verify the managers’ mining site, his experience in this space, etc. before we onboard them and provide them with a safety reserve.
- Total Supply (M)：1 billion
- Storage & asset security: for DADA Mining Funds Aggregator, capitals locked in and released from smart contracts, or multisig wallets; for DADA DeFi Aggregator, we connect users to the smart contracts in those Dex and DeFi platforms.
- Capital flow: governing rules voted out by the DAO constituents.
- Market-Making mechanism: same as Dex, run by smart contracts. The data on volume and spread is on-chain.
- Liquidity: it aggregates a myriad of decentralized exchanges (Dex), and has the traders choose one for the best liquidity and price for his trading pair. The point is, there are plenty to choose from for the best liquidity, and it is free to choose.
- Reserve system: DADA set up a reserve, SAFD, that takes up 20% of the total supply of DADA. It is not a pressure on the system, because, by design, each project would contribute to the reserve. This is a unique feature of DAO. It is only doable in a decentralized organization. And the decentralization is only guaranteed with smart contract technology.
“Not your keys, not your Bitcoins.”
This quote famously said by Andreas Antonopoulos in the event of the Bitfinex hack, educated on how important it is to not trust a corporation as your custodian wallet.
Do I trust a software wallet versus a custodian? As much exchange-related news suggested, a centralized way of storing customers’ money can generate a single-points-of-failure. Some exchanges have the majority of their funds stored in one hot wallet. If one of the private keys to that wallet is compromised or becomes inaccessible, this would be a daunting event. And as a fact, most centralized exchanges are not insured. Coinbase is the only exchange that is FDIC insured, meaning they cover the loss to a certain amount (number).
Here comes in the smart contract wallet. There may be bugs, but it is something that can be worked out, when in the future, DeFi attracts more top developers like those in Bitcoin core.
The codes of the smart contract's wallet are open and transparent. The customers can check them, or an elected group of highly qualified programmers can audit them, as envisioned and carrying out by the DADA developers.
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