The story of DeFi (Decentralized Finance) in recent years has been to bring into the Blockchain and crypto environment the products and services that already exist in the traditional financial market.
Innovative solutions have been developed, combining simplicity and complexity with a business model focused on aligning interests. A notable example is Uniswap's approach, which introduced a system allowing users to create and provide liquidity for various trading pairs. With the help of AMM (Automated Market Maker), it was possible to establish decentralized exchanges (DEX). Compound, in turn, developed a mechanism to issue a dollar-pegged stablecoin (DAI) in a decentralized manner, using collateral and third-party arbitrage to ensure parity with the dollar. Other innovations include Aave with its investment and lending proposals, Opyn in the derivatives field, and Armor in the insurance segment, among others.
And note that here I only referred to the solutions created on the Ethereum network.
Today we have similar solutions, many even copies of the code mentioned above, on practically every public Blockchain network.
In other words, it is already possible to find in DeFi all the products of the traditional financial market. Of course, many of these protocols and processes are in their early stages; many are less than two years old, but due to the volume and speed at which everything is developing, it opens up space for greater flight.
And what flight is this? In which direction?
For me, it's about creating products and solutions that can only be made in this market. Due to the delay in updating regulations and processes, regional peculiarities, and outdated technology, the traditional financial market faces challenges in replicating these innovative products. To better illustrate, we will see some examples.
One of the discussions that has existed for some time about DeFi is the one placed under the banner of Money Streaming. What is the idea? Well, a new block of the Ethereum network is registered approximately every fifteen seconds, which makes it possible to register a transfer operation between two wallets every one of these windows.
Now think of a simple case of salary payment that all workers have, which is currently monthly. With little effort, it would be possible to make a proportional salary payment every fifteen seconds.
In this way, a person, instead of receiving once a month, would receive every fifteen seconds. Going further, it is not difficult to condition this payment to the completion of a task (if you do x, you receive a part; if not, you don't). Thus, something that is traditionally monthly today can become 100% tied to the fulfillment of tasks. This is an example of use in a world where we are increasingly digital, and work relationships are becoming less tied to the physical time we spend in the office and more to the work we do.
Returning to the traditional financial market, would it be possible to do this? Can you program a PIX every fifteen seconds? I think technically it could be done, but imagine the work and complexity of that. In Ethereum, and in most public Blockchain networks, this is already native.
Another wonder of innovation is that, for sure, there is someone out there thinking or experimenting with a use for Money Streaming that hasn't even crossed my mind. And when I discover it, I will be fascinated by the solution. The opportunities triggered by this are immense.
Other initiatives that have interested me are those related to financing these projects and how they are creating backed reserves. These are the experiments initiated by OlympusDao. It issues a backed token (OHM) with a price stabilization mechanism through the increase and decrease in the number of tokens and the payment of interest to collateral providers.
This initiative, which many consider the beginning of DeFi 2.0, had a huge hype in the fourth quarter of 2021 and caused the value of the backed token to be more than ten times the value of the backing, which even led to discussions about whether it was a case of financial pyramid or not. Since then, OHM has faced many challenges and, in 2022, experienced a significant price drop, adjusting to a value more aligned to 1:1 with the backing deposited. However, it remains alive and progressing.
OHM calls itself a decentralized reserve currency because it is not tied to a fiat currency and operates in a decentralized and transparent manner. However, due to the volatility inherent in its adjustment mechanism, it is challenging to see it currently as a store of value. Will this change in the future? Only time will tell. What is certain is that it presents a fascinating approach to liquidity management. It is worth noting that it is one of the rare DeFi protocols that adopt exponential interest, common in Brazil, but not for currencies like USD and EUR. This makes the experiment even more interesting.
In the case of OlympusDao, could its mechanism be replicated in the traditional financial market? It could, but imagine the difficulty of creating ways to pay exponential interest in USD, selling an asset at a discount for future delivery (Bonding), and paying interest to investors who apply this asset with you (Staking), all 24/7, done from anywhere in the world?
I follow these and other cases that show the direction in which traditional markets are migrating, and this excites me greatly.
For me, DeFi is an excellent compass that indicates future possibilities and the direction we should take. Its open, global, and unregulated environment is highly conducive to innovation, and in the very near future, many successful tests conducted here will be incorporated by regulated systems. Drex is a good example of this.