The year is ending, and the cryptosphere is evolving–or has evolved, anyway; 2019 started in a pit of despair and uncertainty, blossomed into an age of recovery, and then fell into what seems to be a rather well-trained path towards maturity. (As ‘well-trained’ as crypto can get.)
In any case, the dramatic arc of the year has pushed certain trends into the background while other sectors of the crypto industry have found their way to the forefront. One of these latter factions is DeFi, or decentralized finance.
In some ways, it seems that DeFi is the latest blockchain-related buzzword to have debuted on the crypto scene: its meaning usually bears a sort of halfway-clarity that companies trying prove their stuff bet on and that better-established firms assume is understood by all.
However, underneath all of the buzz around DeFi lies meaningful progress. Recently, Finance Magnates sat down with Brian Kerr, CEO and co-founder of DeFi platform Kava Labs. Kava is a blockchain solution providing DeFi services such as stable coins, bonds, and lending to crypto users across many blockchain networks.
Brian spoke with us about the true meaning of DeFi, the future of the sector, and how his company is expanding financial services.
Getting behing the buzz: the meaning of DeFi
So, what is DeFi, actually?
“Truthfully, DeFi means something different to different people,” Kerr said. “Last year, DeFi was all about decentralized exchanges–[most] exchanges are centralized, and therefore if you create a DEX (decentralized exchange), that’s DeFi.” Additionally, “blockchain was decentralizing payments or value transfer.”
However, in the context of this year, Kerr said that what people really mean when they say ‘DeFi’ “tends to be lending–so, the ability to create some kind of financial service that a bank offers.”
With only a limited pool of users in DeFi, a few companies have made it their mission to make this new generation of financial services come to life. I speak now with @Brianhkerr, CEO of @kava_labs taking on this mission.
Kerr said that the expansion of decentralization into the loan industry is a sort of logical next step–“so far, blockchain is taking care of the custody and payments–and what else does a bank offer? Lending,” he explained.
“The other category that’s also emerging is derivatives, or synthetic assets,” Kerr added. “So, all of the different financial products you would have in a traditional financial market that don’t currently exist for crypto because it’s so nascent.”
DeFi isn’t just a solution to third-world problems
Why is DeFi important in the first place? Kerr explained that “decentralized things are more efficient generally” when there are network effects. In other words, blockchain and other kinds of distributed ledger technology are especially powerful when a product or service gains additional value as more people use it.
“But particularly, the focus of blockchain technology is to allow everything to be censorship-resistant and trustless–and where that becomes really important is when you look at traditional financial systems,” he continued.
For example, “a bank gets to choose who their customers are–they can say, ‘sorry, you can’t open an account with us’; a government gets to choose what countries they sanction and place regulations on the prohibit economic activity. Things like your identity or your credit score also prohibit or enable you to get different levels of financial service.”
“So, the promise of DeFi (or the application of using blockchain technology) to then take what exists in the traditional financial world and then bring it here into software is that if you remove the needs for trusts or counterparties on one side, anyone can interact with financial services and effectively get the financial services they need, whether that’s custody, whether that’s payments, receiving a loan,” Brian continued.
A fascinating thing (that I don’t think I really have a true grasp on yet ) is how Kava can operate like a decentral bank – offering a place for people to store their crypto (via decentralized custody on the cdp platform). The idea of decentralized custody is fascinating.
Thus, the promise of DeFi is to expand the financial world into corners of the globe that have never been reachable by it before: “in many parts of the world, it’s just not possible for [a variety of] different reasons,” Brian explained.
“US-based people often say ‘well, I’m a first-world country, it’s not my problem, so I don’t need to pay attention to it’–well, we actually experience a lot of that in our day-to-day, especially in the cryptocurrency industry itself.”
For example, “if you’re not an accredited investor, but you still trade cryptocurrencies, in the US, you don’t have any access to lending products like margin trading. You couldn’t get a levered position on BTC if you wanted to–it used to be available, but regulators forced the exchanges to stop offering that to US customers.”
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How does Kava work?
Brian explained that this is the set of problems that Kava is attempting to address with its products and services.
For starters, he said, “we’re not your typical ICO or crypto project in that we didn’t just take an application outside of crypto and saying, ‘ok, now we’re doing blockchain for healthcare’ or blockchain for gaming… we, as a company, sat down and asked ‘who is using cryptocurrencies today in bulk?’”
“Our first assumption is that it was used for payments,” Brian continued. However, “that turned out not to be true–payment volumes are really small.”
Instead, Brian said, “where people use crypto assets today is primarily with trading and speculation on exchanges.”
”Speculators are effectively just gamblers, and exchanges are the casinos that they live in and play in.”
“Another way you can think about it is [like this]…speculators are effectively just gamblers, and exchanges are the casinos that they live in and play in.”
“So,” he continued, “if that’s the killer use case for crypto today, what products do these people need?,” he asked, “well, they want to be able to win in both ‘up’ and ‘down’ markets…so, what Kava offers is a trustless way for people to access a loan and stablecoins, so in the case of an ‘up’ market, they can receive a loan with their crypto assets as collateral, and effectively take out a margin position by using that loan to buy more of that same asset.”
Brian explained that this is similar to how margin trading works in traditional markets–”if I’m buying Apple stock, and I’m using a margin account, instead of buying one Apple stock, I can buy two with the same amount of money; in this case, traders have the option to do this with crypto assets now.”
“In the case of ‘down’ markets,” he continued, “the loans are issued in stablecoins. So, with every sort of marketplace or transaction, there are always two parties. The people that are taking these stablecoins are the people who believe that crypto is going to go down–they want to maintain a store of value pegged to the US dollar.”
In other words, “our stablecoin provides traders with a means to exit out of their crypto positions and maintain their current level of value for some period of time before they go back into the market.”
While institutional investors may prefer to work with centralized entities, Brian Kerr believes that smaller traders “will lean more towards DeFi, going forward.”
“I think what we’re seeing is that people are feeling–in DeFi and CeFi (centralized finance)–is that everyone should be offering lending products across the board.”
However, “financial institutions and people with a lot of capital will likely prefer a trusted relationship with a centralized entity that is regulated and does have certain constraints so that it can’t run away with [investor capital].”
Brian believes that smaller traders, on the other hand, “will lean more towards DeFi, going forward.”
Why is this? “That’s where they can get access,” he explained. “Regulations aren’t serving them, for different reasons.”
Brian says that he sees 2019 as “the year of DeFi, the year of stablecoins; the emergence of additional fiat onramps into crypto generally. I think next year, the industry [will continue] to mature as a financial industry.”
Brian pointed to the fact that a number of cryptocurrency exchanges are already offering derivatives products as evidence of this. “Derivatives are now becoming the mainstay of where all the volume is and where all of the activity is within crypto.”
“So, I think where DeFi is gonna evolve is that we’re going to see not just much more activity on the lending [side of things], but also in extending lending and extending stablecoins into new products–options, futures, forwards, all sorts of new financial products that just don’t exist for crypto traders today.
Most #crypto investors get addicted to asking questions like “what’s the use case?” because it filters the scam projects. I’d bet that filter creates blindness in many leaving them unable to see the next ethereum or big thing where use cases are wide/generic or hard to articulate
“I think DeFi has been very, very contained with the Ethereum user base, and there’s this pent-up demand between all the other asset holders–particularly those that don’t really care about ETH, for whatever reason. They want DeFi, and they just don’t have a way to get it,” Brian said.
“So, what we’re going to see in the coming months and in 2020 is that many new platforms–Cosmos being one of them–will start having new developers that are focused on DeFi solutions that won’t be contained within the Ethereum ecosystem.”
“We’re seeing a little bit of that with EOS, on PolkaDot, and pretty much any large project that is a top 20 coin today–they see DeFi as the growth trajectory.”
This was an excerpt. To hear the rest of Finance Magnates’ fascinating interview with Brian Kerr, co-founder and CEO of Kava Labs, visit us on SoundCloud or YouTube. Special thanks to Brian and to the Kava team.