DeFi is the future of finance, and enables the potential to construct complex, inter-connected financial systems. It is transparent, democratic and composable. Offers numerous advantages against traditional finance legacy systems, but it is not perfect. It is a complex ecosystem where non-native users won’t understand, with topics like impermanent loss, Automated Market Maker (AMM) or yield farming to name a few. Blockchain itself does not simplify it either. There are nodes and staking. Also multiple chains and several token types. Wallet addresses are long and weird with a 24 word seed phrase as a last resort security measure. Other pain points are unregulated markets and an arguably high risk of hack, exploit or rug pull. Although the pros offset heavily the cons.
DeFi is the future. But in reality the future of finance could be TradFi Institutions running entirely on blockchain and through DeFi protocols. Converging in one.
This is how I envision banking in the future. A place where people have full control on their finances, built on top of decentralized protocols that manages crypto complexities and abstracts them away, with a regulatory layer of safety and a high grade tech infrastructure powering a diverse range of solutions with optimal UI/UX.
A user should be able to: Send, Receive, Spend, Save, Get Loans and Invest in the same fee-less platform while being Insured and their Data has been AML/KYC’d.
DeFi has been growing at a superb rate. In January 2020, TVL locked on DeFi was at 700m. In January 2021 it was at 19B$ and six months later it was at 60B$ on Ethereum plus 30B$ on Binance Smart Chain and 10B$ on Polygon sidechain. It has attracted a total 100B$ of value in 18 months
Despite DeFi’s great surge in value lately, it is still on it’s infancy. DeFi will mature and gain sophistication, resilience and liquidity. Future users will be more educated and the UI/UX will improve drastically, thus potentially attracting trillions of dollars in value.
But, as of today DeFi has managed to build the foundational tools for the future of finance such as Money Markets for a trust-less borrowing and lending. Stablecoins as a medium of exchange. Capables to resist heavy market fluctuactions and crypto volatility. Exchanges processing bilions without orderbook nor middle-man. Any-kind derivatives creation like Stocks/Fx/Commodities… Asset Management tools and open-source Data/API’s. Autonomous and dynamic Hedge Funds and decentralized insurance protocols to buy insurance or trade on risk of crashes, exploits, hacks…
Current issues with Traditional Banking.
Lack of transparency. Bank’s aren’t transparent, you can’t know where your money is or what it is being used for. Hence creating distrust on the financial institution. Many people don’t even trust their own bank to use their money wisely.
Financial exclusion. 1.7 Billion people worldwide are unbanked, unable to access basic financial services like a bank account or remittance services. After the global financial crisis, banking became more exclusive, where strict lending rules and underwriting models were applied to banks. Causing an increase on credit rating to lower the default risk. Small and medium enterprises (SME) and retail were the most affected by those new policies facing difficulties to borrow from banks. Meanwhile SME represent 90% of businesses and more than 50% of employment worldwide.
Centralization and Intermediary costs. Banking services are siloed amongst few top players and regulatory obstacles that keep the barrier of entry high for new banking entities, resulting in an oligopoly market. So that centralization enables high intermediary costs and results on an inefficient usage of market liquidity.
Legacy infrastructure. Financial technologies used by mainstream entities haven’t evolved in decades. They are inefficient, fragmented and opaque. Creating disinformation and distrust while being unable to exchange data or interoperate between institutions either. Banking should be a easy, should be a one-click feature, and current infrastructure doesn’t allow for it.
Low Rates. The average savings rate in the US is ~0.1% and the 10-year US government bond at 1.5% while inflation has reached 5% and interest rates are at 0%. That is a fatal combination. Inflation is eroding all purchasing power of savers which are disincentivized to do so because inflation surpasses the yield generated by those rates.
Advantages of Blockchain and Decentralized Finances.
Transparency and immutability. Being built on top of a permission-less distributed ledger where anyone can interact without being censored, creates total transparency of actions on it and information is forever verifiable on-chain.
Democracy and agility. Protocols are governed by the users holding its token. And improvements, proposals and any governance decision is made democratically amongs token holders. So creating a dynamic governability that is able to adapt to the fast changing trends of crypto, is valuable if decisions are made based on the benefit for the protocol, it’s priorities and long-term vision.
Liquidity and security. Thanks to smart contracts and blockchain, we are able to create forever-open markets with deep liquidity and enhanced security. Funds are pooled together on a smart contract improving capital efficiency and tasks like borrowing, lending, sending, trading… can all be done inexpensively and instantly. While being secured by cryptographic proofs that protect capital by code without any middle-man.
Freedom and inclusion. Anyone with internet access can enter and interact with it. freedom to choose multiple fold actions like investing without the bureaucratic burdens from traditional finance.
Composability. All systems can interoperate between one another through smart contracts. Creating powerful inter-connected economies. Like money legos, Dapps can combine and build new forms of financial services never thought possible.
Now, let’s dive in on how I envision Banking 2.0…
Bank Account & Crypto Account.
Both accounts should be unified in the same interface. A digital wallet capable of holding users assets, fiat and crypto in a secure way with great interoperability, rapid on/off-ramp liquidity and a wide range of functionalities.
On-Ramp Solution. Change liquidity of assets between fiat and crypto seamlessly with no fees. (Fiat-to-crypto / Crypto-to-fiat). / Credit/Debit Card-to-crypto…
Top-up your account with credit/debit cards and other bank accounts.
AML/KYC & Data Compliance. A security and regulatory compliant framework for all institutions/retail data.
Savings Solution. Where users would lock their assets on a savings account to earn a stable and predictable return.
Fiat & Stablecoins ~10–15%* Volatile assets~5–10%.
Positions will be insured and the user is free to withdraw anytime.
*In the backend, once locked. Fiat should be swapped for Stablecoins and distribute them through a wide range of DeFi protocols. Such as LP on Dex’s, Supplying liquidity on Money Markets, or using Yield aggregators.
Actually the most used, reputable, high yielding, Total Value Locked (TVL) and last-longing DeFi protocols are the following:**
DEX / AMM: Uniswap, Sushiswap, Curve, Balancer, Bancor.
Money Markets: Compound, Aave, MakerDao, Anchor.
Yield Aggregators: Yearn, Alpha.
** Note that the crypto landscape is ever changing and new DeFi protocols emerge on a daily basis. Some are promising, some are scammy. Also they can offer much higher yield but they also come with a much higher risk.
Some of these DeFi protocols could be: Alchemix Finance, CREAM finance, Liquity, BadgerDao, dy dx, KeeperDao, Idle, PancakeSwap, Venus Protocol…
Credit & Loan. Users are able to receive loans based on their Credit Score and Loan-to-Value (LTV) Ratio. Which is represented by the totality of assets held in the users wallet accounts and open positions.
A user could be eligible to receive a loan in Fiat to spend anywhere just by holding Ethereum in his crypto wallet.
Payment Solution. Credit and Debit Cards and payment processing infrastructure. Where you can exercise payments in both accounts in real time with instant and zero slippage conversion fiat-to-crypto with multiple merchants worldwide and compatible with Visa, Mastercard, ApplePay, Paypal etc…
Remittance. Send money to anybody, anywhere, anytime. Using an infrastructure liquidity solution to transact funds instantly to different parties around the globe.
Users wallets address would be a username like @Jacob.crypto rather than the large and complex usual address.Reducing significantly time and cost to send money with a compliance layer on a global scale.
Custody Solution. Assets from users will be stored safely at all times when being on the account and wallet. When the savings solution is used, funds will be transferred accordingly to DeFi protocols. Where the positions are non-custodial and the bank will still keep custody of the assets.
Insurance. All assets will be insured and the bank positions will be covered in the worst-case scenario. Such as Code/Bug exploit, Flash Loan Attacks, Malicious actors…
Digital wallet alternative to the bank and crypto’s wallet. Where you will be able to invest on the following markets.
· Crypto Assets. 1,5 Trillion combined Market Cap.
· Forex with a total industry value of 2,4 Quadrillion.
· Sinthetics and Tokenized products.
Equities 95 Trillion market cap.
Commodities: Estimated ~30 trillion market cap.
Real Estate: 280 Trillion global market cap
Derivatives: 11 Trillion Gross Market Value and 560~1000 Trillion in Notional Value
I believe the major drivers of financial gap between retail and corporate are lack of investing freedom and financial instruments & data.
That’s why opening for retail the option of universal access to all major financial markets, with a strong asset management and strategies could be a game-changer. And is the reason why DeFi has gotten so much attention lately, levelling the field for everyone.
Banking should permit users to invest in any crypto asset by two main ways.
Using a proprietary Crypto Exchange (CEX) with liquidity for all major assets and compatible with margin trading, futures and staking.
Using a third party DEX Aggregator like 1Inch or 0x that would offer optimal paths to trade through DEX’s and cover all tokens on the market.
Remittance and currency exchange using liquidity solutions for corporate and retail users.
Being able to swap seamlessly among all currencies will allow greater liquidity, better deals and fast conversion for financial freedom. Leveraged with the remittance system where you can send those funds anywhere, it’s a powerful solution.
Also it enables to invest in the Forex Market speculating on the price of any of all major currencies.
Interesting solutions built on these niches are Ripple Labs as a liquidity solution and Jarvis Network as a Fiat-Forex Layer.
Tokenization and/or Synthetics.
Secure and compliant issuance of trading instruments. Enabling greater liquidity, flexibility, and options.
Securities. Trading of major worldwide stocks and ETFs like Apple, Amazon, Alibaba, SPY, QQQ…
Current protocols like Mirror enables mirrored synthetics of these assets that track their price and can be traded even when markets are closed.
Compliance Securities tokenization can enable businesses to tokenize their shares or kickstart liquidity/attract funds in a STO, easier, cheaper and open for any kind of investor worldwide.
Real Estate Tokenization. “It’s not mine, it’s from the bank.” We’ll not anymore.
Example: Alice gets a mortgage credit and Tokenizes the Real Estate debt. (worth 300k$ and 3.5% interest on credit with a duration of 25 years/300 months).
Then it’s minted Alice House Token $AHT.
Alice will pay 1000$ + 35$ (Interests) monthly during 25 years to fully repay his loan.
Every month after the payment she will receive 1/300th of the token $AHT, representing his ownership of the Real Estate and debt paid.
When Alice finishes paying his loan, she will have the full 1 $AHT token. She is the full owner of the Real Estate.
What can Alice do with the token or fractions of it:
- Get credit using $AHT as collateral. Bank can offer a Loan To Value (LTV) ratio of 150%. So if Alice has 0.5 $AHT (worth 150k$), she can receive up to 75k$ in credit.
- Sell the token to a third party. Alice sells his 0.25 $AHT to Bob for 75k$. Now Bob is the owner of 25% of the Real Estate. With everything that implies.
- Idea. Real Estate developers/agencies could buy stakes of buildings. And make a profit later when they sell/owner sells if the building has gone up in value.
- Idea. Create a basket of Real Estate tokens and add them as liquidity on a pool on an Automated Market Maker (AMM). Now you have a REIT where anyone can trade on it anytime.
Commodities. Synthetic creation of major commodities like Oil, natural gas, metals, precious metals, agriculture products, animal products, cocoa, coffee…
Bonds. Tokenization of financial bonds between parties to extract better liquidity and use cases.
Derivatives. On any kind of asset and form like futures, options, Long/Short positions, specific metrics or outcome…
UMA Protocol enables the creation of any-kind derivatives.
It is necessary and indispensable for any financial institution. It permits to calculate and mitigate risks taken and improve capital efficiency.
Should be done by a thorough research and analysis of all available data, strategies and algorithms that determine optimal paths and allocations. Which will change dynamically based on different risk-reward strategies.
The following metrics should be constantly being analyzed by the asset management team in order to further improve the system and methods.
On-chain Analytics: Tx’s volumes, Big Transfers, State of the chain…
LP Data: Yields, Liquidity, Liquidity mining rewards, Impermanent Loss, Protocols…
Crypto Yields data: Protocols, APY, Strategies, Assets…
Risk profile of Protocol and User. Code, Battle-tested, Insurance, Liquidity, Analytics, behavior, Team…
Portfolio tracking and optimization. Based on all data recollected and user risk profile.
Sentiment. Based on News, announcements, social media, on-chain activity, T.A …
Advisor. A.I advisor based on user risk profile and behavior.
Research and publications. On emerging trends, protocols, asset management…
Asset management services will be available to individual retail users, corporations, businesses, crypto related companies, DAO’s and even traditional finance institutions.
Services could be, but not limited to:
Crypto Indexes (ETFs like)
TradFi Indexes (iShares)
Investment banking will be a more siloed and external branch, rather than the commercial bank oriented to retail and user-centric.
Here the main goal is to maximize returns in a risk-reduced way, with a variety of investment techniques and leveraging both blockchain technology and asset management services. This way Investment banking would have improved their efficiency, modernization and opened a whole new asset class.
Tha branch would have:
Portfolio Investing. (Stocks, Crypto, Forex, Real Estate and Commodities)
Mergers & Acquisitions.
Venture Capital and STO Investing.
Wealth Management and Asset Management
Financing (Bonds, Equities and Debt).
In the most basic form, banks revenues are loans interest + fees — interest paid to deposits.
Using DeFi we can manage to eliminate the interest paid on deposits and maximize revenues.
Obtaining the following formula: Loans Interest + Fees + Spread from DeFi Yield & Savings APY.
We have eliminated the interest paid to customers by leveraging yields and earning income on user deposits. Which results in a net win.
i. Bank & Crypto Account:
- Interest from loans/credits.
- Spread from DeFi Yield & Savings solution.
- Fees from remittance / Cross-border
- Fees from processing payments.
- Fees from Insurance
ii. Asset Management
- Fees from Advice and financial data
- Fees from asset management and Index structuring
- Freemium model
iii. Investment Account.
· Fees from Cex Trading. (spot, margin, futures)
- Forex, Sinthetics and Tokenized assets.
· Trading fees.
These diverse range of protocols or blockchain startups could bring big value to banking services and their tech stack should be leveraged in order to increase efficiency and benefit users.
Payments and Credit/Debit cards. Coti, Swipe
Remittance. Ripple Labs
Insurance. Nexus Mutual, Bridge Mutual, Union
DEX/Liquidity. 1Inch, Orion, 0x
Custody. Ledger, Trezor
Oracle Services. Chainlink
Savings. Anchor, Yearn, Aave, Compound….
On ramp solution. Ramp.network
Compliance, KYC/AML. AllianceBlock
Securities and commodities. Mirror, Synthetix
Forex. Jarvis, Curve
Real Estate. Open Protocol
Data. Lunarcrush, Messari, Bloomberg…
STO & Launchpad. LCX, Dao Maker,
That’s all hope you’ve enjoyed and I’d love to know your opinion and if you share my vision on an inter-connected financial world at Furma