SEP 2020 - NEWSLETTER
What if DeFi? – Excerpts from the Infinite Machine by Camila Russo
By Kas Vardhanabhuti
September 4, 2020
We are bullish on Ethereum because of DeFi. Most of the DeFi projects are built on Ethereum. The paragraphs below outline what DeFi is and are excerpts from a new book called The Infinite Machine by Camila Russo. (I highly recommend this book if you want to learn more about the digital assets space).
“Another big trend was emerging in Ethereum, and Alvaro Yermak, an Argentine bank teller was benefiting from it. In September 2018, five years after Alvaro bought his first bitcoin, he was married and vacationing with his wife and her child in the Brazilian beach town of Natal. They had saved for months for that trip and made the reservations back in March. Emma, who calls Alvaro “dad”, had been counting the days since then. One day, they were checking their emails in the hotel lobby before going to the beach. Emma was tugging at their T-shirts for them to hurry up.
They were about to head out when Alvaro thought about looking at his bitcoin wallet balance. The market had been horrible that year, but he continued to buy fractions of coins whenever he had a few pesos saved up. Alvaro’s job at the bank gave him a first-hand look at the economy. He had been promoted to supervise the ATMs in Tucuman and could tell how fast money was changing hands. People were leaving the machines dry. Salaries weren’t keeping up with inflation and people were having a hard time making ends meet. Taking out loans, especially long-term ones like mortgages, was out of the question for most as interest rates skyrocketed.
So when Alvaro checked his Ripio digital wallet (where he bought and stored his bitcoin) from the hotel lobby in Brazil, he was surprised to see a new “loans” button. Alvaro requested 4,500 pesos, or a little more than $100 at the time, just to test how it worked. The app had verified his account with a copy of his ID and a pay stub a few months ago and didn’t ask for anything else this time. Two days later, he had an extra 4,500 in his digital wallet, which he would have to pay back, plus 6 percent interest, at the end of the month. He couldn’t believe it. He was able to get a loan when he was away on vacation, with sand between his toes, without having to sit at a bank and sign on the dotted lines. It just took a couple of clicks and two days. Most important, he would pay way below market rate.
A few days after he got back home, he applied for a second loan for 75,000 pesos, and again had the money in his account within two days. He immediately used it to continue making his usual investment: he bought more bitcoin. The cryptocurrency slumped almost 6 percent in September, but Alvaro wasn’t worried. He’s in it for the long haul.
What Alvaro didn’t know was that on the other side of his loan wasn’t Ripio lending him the money. There was an investor, who could be anywhere in the world but let’s say South Korea because many of Ripio’s enthusiasts are concentrated there. The app exchanged the investor’s ether for the Ripio Credit Network’s token, called RCN, and from RCN to pesos and then back again when the loan was paid. The lender got his loan plus interest back in ether. The loan itself was a smart contract that automatically executed the exchange. The Ethereum-based digital token and network enabled a worker in a far-flung province of Argentina to borrow from an anonymous investor, who was probably on the other side of the world. Neither knew who the other was. There were far fewer
intermediaries involved in the process than with a regular bank loan, so Alvaro was able to get a better rate, and the global network allowed him access to a larger pool of potential lenders. The investors on the other side made a sizeable return.
Alvaro has a bank account, but someone without one, which is about 60 percent of Latin America, can also get access to credit. All they need is an internet connection and a cell phone. They can use cash to charge their digital wallets in the same payments collecting services at subway stations that they use to pay bills. In 2018 about 20 percent of Ripio’s 300,000 wallet users didn’t have a credit card.
A new Ethereum based phenomenon was emerging and it was one of the main drivers of innovation in the blockchain space. Crypto startups were creating a whole new financial system from scratch. They were ditching old ways of banking, where financial firms control users’ information, hold their money, and sit in the middle of transactions taking a cut. Instead, all the services traditionally offered by banks and brokers, from lending to trading and betting, are being built on the Ethereum blockchain. Because these apps run on the public Ethereum blockchain, it means the flow of funds is transparent and anyone can take the open source code and inspect it. They can even fork a project and modify it. The movement came to be known as “decentralised finance”, or DeFi. It was banking without banks.”
The potential of DeFi is large and far-reaching as DeFi can disrupt traditional finance and the banking system. Although there are many risks with DeFi, including the current speculative fever and the Ponzi economics of some of these DeFi tokens, there will be projects coming out of DeFi boom that can drive meaningful changes to how the world works.