Hello and welcome. I'm chubby Jim Singh from the money my team at CNN Decentralized Finance, or DeFi, has seen a sudden surge in popularity and is seen as a new way of doing finance. But what exactly is DeFi and what are the five things you need to know? If you are thinking of putting your money into decentralized finance?
Joining me now is Shane I, head of R&;D at Bybit, a cryptocurrency exchange and Xencor, and the co-founder of Bitcoin Exchange, which launched a first public bitcoin machine in Asia early 2014. She is currently the CEO of God, which provides easy and affordable access to cryptocurrencies. She's also the advisor to digital asset and DeFi fund Zen and Shane. Welcome to the
show. Thank you. We're happy to be here.
I shall be glad to be here.
Zen, let's start with you. Help us define what DeFi is. The way I understand it is that DeFi uses technology to replace centralized institutions such as banks or financial institutions
to decentralized finance is a long time coming on. What are the changes or stuff that we have been paying for in centralized finance? For example, we have been paying dearly for trust, for access to liquidity or access to counterparties and also on execution costs. And all these costs are almost eliminated in a decentralized finance world. So it is a finance world whereby execution costs and the minimal costs are kept with a very minimal.
I do agree with Dan on this point. It's been a long time coming. I'm coming from a trader's point of view. So if you think about a lot of the investors or traders that go into crypto in 2017, if they wanted to get in and out of the crypto ecosystem, they had to sell DRC Bitcoin Etherium into fiat currency like US dollars or Singapore dollars. However, the DeFi ecosystem actually allows for a lot of this capital to sort of slosh around within the system, say earning yield,
earning interest. So it's a natural complement to the original crypto ecosystem. So that's one of the reasons why I see it's popular right now.
Speaking of popularity, DeFi has grown by leaps and bounds. There's over 70 billion US dollars of DeFi assets today, compared to just under a billion in 2019. What are some of the advantages of using DeFi?
Some of the returns in centralized finance were eroded away by paying for commission or paying for just having SS or even sharing profits with another third party. But in centralized finance, you are getting more in control and the time and the speed of it. Sometimes kids enjoy finance.
Just getting a cow could take months. And also what I love about DeFi is transparency, because if you know what you are doing or you're aware of all the protocols and the platform they're using to me is very transparent. Centralized finance for many years is a opaque box to a lot of people. You know what kind of products you might be putting into, but in terms of how your money flow back or how if you're a lender on board is a huge box in between which black box?
I'm going to give two simple examples why there are some advantages to using DeFi. So number one, if you have been in the crypto ecosystem for a long time, investing or you do. Fixed income products are staking in crypto. You'll realize that the execution speed, as Zain mentioned how efficient the entire process is versus the traditional banking system.
From a second perspective, DeFi allows very quick iteration and experimentation or financial products and even stuff that would traditionally be under the purview of the institutional sales and trading desk at the bank. If you look at overnight swaps or fixed income derivatives within a short span of a year, you've seen a tremendous development a DeFi space covering all sorts of products. I think it's a brand new way of looking at things, and definitely it has a lot of potential here.
Shane beside the speed and lower costs. Another advantage of DeFi is also the possibility of higher yields. Why is that
about the high used in DeFi? One of the huge reasons that I see, aside from taking all of the middlemen, is that the crypto ecosystem is still growing and a lot of people are bullish on the space. A lot of capital flows into the space. Often that capital comes in the form of U.S. dollars. You get a lot more growing demand for dollars within the crypto ecosystem and
line up supply to meet the demand. With a market interest rate sort of clear, that is where we are currently seeing you look at the beginning of the year, it could be as high as over 10 percent for basic lending of stablecoins. And if you look right now to the market down a bit and probably people are slightly less excited, this is the beginning of the year. You're going to see race closer to, say, four percent per annum.
DeFi seems to have several advantages compared to centralized finance. Let's talk about how investors can. Get in on the action. Where are the opportunities?
One typical way where people have crypto and they do not want to sound crypto or they want to have a long term view on it. So instead of having the cryptocurrency in the coaches ticket and an momentum, I can see some common interest. You would lend it out and on the other site, somebody is actually in a way, borrowing. So there's a borrowing costs. You can see the platform, how much its borrowing costs and what is that you
for you to start your crypto. So there is that one basket, which is like interest income and the other one is more growth kind of alpha kind of returns where you're actually buying into DeFi stock appreciation and you actually jump from tokens to tokens, depending on the statistic on looking at, or especially right now for the past few weeks when there's a price correction, you see you jumping up some downs and some price correction as well in other tokens and I think is in a way
is good for the ecosystem. It's almost like a testing of what some of the insurance protocols are. You call some of what the position taken. Some crypto assets are. Liquid hates it when the price move, so is in a way testing the smart contract that you sign onto.
The past few weeks, there's been a huge stress test to put it in banking terms for crypto ecosystems and especially DeFi. If you think about last year in March, there was a huge fall down the entire crypto sector where we saw bitcoin dropping more than 40 percent in one day. And during that time, one of the ticketing protocols, MakerDAO had his stablecoin Dai pegging from where he was supposed to be trading. At that point in time, DeFi
wasn't that Brazilian, as it is today. The liquidations that we saw recently across the entire DeFi ecosystem, the absolute dollar amount is just larger than what we saw even in history. While many people will liquidate that, that was how the DeFi ecosystem was supposed to work, and we did not really see any contagion trends playing out. I think that speaks very largely to how far the sector has come.
Does that mean that there's this close correlation between bitcoin price movements or cryptocurrency price movement and asset locked in the DeFi space?
When you look at DeFi, for example, you mentioned 70 billion. Maybe earlier in the year, it was closer to 100 billion plus a huge part of that because a lot of the collateral that are locked into DeFi protocols are denominated in bitcoin or ethereal.
Just to be clear, you're referring to the total value locked in DeFi assets.
Yeah. So when the dollar price comes down, obviously you see some drop in total value locked. But if you go beyond that, you can also see whether or not there are net outflows in terms of the actual currencies themselves, like bitcoin in. To answer your question more directly, just to give us an example of where someone wants to borrow stablecoins, someone deposits all his bitcoin into, say, a compound finance, and he uses debt as collateral, not because
of the loans in DeFi over collateralized. He has to borrow less than what he put in in dollar value terms. So when the price of bitcoin drops down, then his collateralization ratio gets put at risk as well. So hence, you can think of it as margin trade in terms of the structure. So if the entire DeFi landscape is filled with loans like this, then a very quick shot down slightly could easily liquidate a lot of loans, simultaneously
building onto watching it for some of the borrowers in a deep space, almost having options in a way on their asset. So when you look at the centralized finance, whenever this opportunity, you actually have a bigger impact on your asset value. So that's what happened. Same thing is in the DeFi space.
So to recap, decentralized finance removes banking intermediaries all centralized exchanges from the financial system. DeFi is gaining popularity because it promises lower costs, quicker turnaround and higher yields. And there are multiple ways to get exposure to the DeFi space. For example, you could earn interest on the cryptocurrencies you
loaned out, all by buying if I stopped. I've been speaking with Shane I from cryptocurrency exchange Bybit NZ Quant, the co-founder of Bitcoin Exchange and the CEO of Duty. Now let's talk about another opportunity for investors in DeFi, and that is yield farming. Shane, could you tell us what that is
for yield farming? I think about it. Quite simply, if you think about a long time ago in Singapore, when we had when Grant coming to market, initially everyone was still taking taxis, when Grant wanted to bootstrap their user base, so they started giving out things like free. We can ride coupons, things like that that got a lot of people to start using a platform onto the station that we see today. So the DeFi space is similar to
what we saw back then. Right. They are trying to incentivize users shit by, for example, you deposit liquidity into any of the protocols they got to give you their mint tokens in return. The only difference between this and the example that I mentioned just now is that some of the tokens that are given out say on the more blue chip type of DeFi protocols. This was actually
probably more sustainable in the long run. It's not the same as, you know, you just want to spend a coupon it get your baby right, you want to use these tokens and accumulate them as a longer term kind of investment opportunity. So it really depends on the individual protocol themselves.
I think, in short, is to just maximize the returns over the longest period of time because they are some product. You can get really high returns, but just a short time, but you know that you're going to be in it for the long haul. So over a longer period, time wise of maximum return that you could do.
All right. Well, there are plenty of exciting opportunities in DeFi. There are also plenty of risks. Then what are some of the risks investors should be aware of?
DeFi ultimately is built up from a series of smart contract. Same risks. We talk about the smart contract risk, the failure of what a smart contract is set up to do. It didn't do it in platform risk depends on which platform that you are building on. And of course, we still in a way have built into the smart contracts. Some of the counterparty risk and one of the biggest
risks is the user risk. Not knowing what you are doing and not in a way killings on a crypto that you've just gone recognizing solvent to scan platform off scam. And especially where that just accelerated growth of DeFi products right now.
Jane, yeah, I agree very strongly with the user risk and go the technical smart contract risk is quite well known, but basic security procedures, when you handle your own wallets, you have to know the difference between, for example, a cold wallet and a hot wallet. You have to know digital signatures. You have to know how to not expose your private key to the rest of the internet. That's where the risk report comes in. You have to put in more work in order to get these higher returns.
This is a good exercise in responsibility in handling your finances
just to pick up on scams. Then how do you recognize a device game
for the longest time in a centralized finance, people linked higher risk to higher return, vice versa, when somebody had such a high yield DeFi. The first thought that a lot of people think that is it a scam? And then when they start seeing things happening for real, they say, Oh, it's not. So they end up being over positive about the whole space. Double digit returns is common, so they started to participate in some of the platforms or some
of the products that give that. But ultimately, the whole thing is not a real product and not a platform. The whole thing is a scam is getting quite sophisticated. There are people who are involved in it didn't realize it later on, just like how the whole development of the whole crypto scene for so many years ago, when people started using Bitcoin, Bitcoin wallet, their scam wallet, that people download it from Apple Store a few years back.
So now that DeFi platforms that are probably the beginning giving you the returns, but actually it's not real. My concern is I know there will be people losing a lot of money in the next one or two years or so.
I do agree that a lot of the scams that we see these days, aside from the sophisticated ones that send mentioned, we are looking at some people who, you know, just launch new coins on new projects. They run ads online or on social media. You see, like, there's a lot of hype going for a new coin and the price is going up really fast. What happens shortly after day is that it turns out to be a pump and dump type of scheme. Right. So think of like
Wolf of Wall Street kind of business model. I think it's quite important that if you look at DeFi protocols themselves, probably the first filter you want to go by is how much funds have been locked into the protocol and how long it's been around as long as this market, because of the longer ones, not the bigger, more established ones who have proven themselves, have a larger degree of decentralization governed by what we call a decentralized autonomous organization,
or DAO. These ones are less susceptible to rock pools by the founders.
And just to define a rug pool, this is when someone runs away with your money.
Yeah, that's right. So a simple example is if someone creates a coin and he owns a majority of the tokens, so if he owns a huge chunk of the tokens, it's very easy for him to dump it on the entire market.
Until we have seen that happening two three years ago during the ICO boom. So it's not a new scam where people raised or sought tokens based on white people, and they did some management of their tokens for money in pump up the price and then so on. And does it close of business
with the risk of a boom and bust like we saw with Ikos, where we saw multiple scams and failed projects? Is DeFi here to stay?
Definitely. Whatever happened seven eight years ago when we talk about blockchain is going to change finance or how cryptocurrency is going to be a new way of payments. You know, all the talk that we've been talking for almost a decade we're seeing right now and the speed of things that are changing and being innovated in terms of even products platform, how are being reinvested in a space is just even for us in the space. We are learning
and trying to catch up as well. I see as maybe two or four years down the road, whatever we're seeing now would be very different from later. But ultimately, whatever that is happening in the IOC, the tradition of finance with the opposite, the trust, the accessibility, the high costs of this are being removed in the DeFi space. And with that, DeFi is here to stay. What has been lagging the past few years is somewhat of technology
or the use of base is not big enough. But now definitely you look at what's happening in just the past few months or the first quarter itself. So my bet is definitely here to stay and to thrive.
Just got to live with this one liners. So basically, assuming all the DeFi protocols from here go to zero and nothing comes out from this, the worst that could come out is is that the world has witnessed firsthand and you cannot unsee the kind of innovations that have taken place within the DeFi ecosystem. And there are a lot that has been improved on versus the traditional finance system. And at the very least, it can serve as a
very strong, positive inspiration for building a more digitalized. Digital infrastructure going forward,
for those with some skin in DeFi, let's hope they are left with more than just inspiration and also see some profits. Zain and Zain, thank you very much for being on the podcast.
So thank you, everyone.
Thank you, everyone.
I've been speaking with Shayna from cryptocurrency exchange Bybit ends end quote. The co-founder of Bitcoin Exchange and the CEO of Beauty. Thanks for listening and catch us again on the next five things you need to know. Podcast by CNN. Money My Team.