Ethereum May Be One of The Most Important Innovations for Finance: David Iach
Also, there's now $1 billion in DeFi!
Hello Defiers! Crypto investor David Iach is taking over The Defiant today. Iach recently spurred up debate around the need for an Ethereum-based fundraising mechanism that aligns investors’ and projects’ incentives. After the ICO boom and bust, the space has been wary of pursuing decentralized fundraising again, and it’s broadly recognized a better system is necessary.
Here, Iach dives deeper into his “liquidity fundraising” idea. He also describes two new innovations: “influencer financing” and “no-loss investing.” Read on to see what he means; it’s a good one!
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Before we get into David’s column though, the following deserves some space:
DeFi Just Reached the $1 Billion Milestone
DeFi, prone like Ethereum to a mythological animal-filled aesthetic, is now an actual unicorn. Decentralized finance platforms are holding $1 billion in value, according to data compiled by DeFi Pulse, which tracks digital assets deposited in smart contracts of 21 DeFi projects.
With ether surging past $200, it’s no wonder value in DeFi is soaring. But it’s not just the rise in ETH that explains the move, as net amounts of digital assets have also been on the rise. Ether in DeFi increased 3 percent in the past month to 3.13 million, or about $689 million (with ETH at $220). Dai locked surged by 48 percent to 67 million in that time. Bitcoin locked in DeFi rose by 8 percent to 1.57k.
Image source: DeFi Pulse
MakerDAO is the most important platform in the space, accounting for almost 60 percent of value locked. It’s followed by Synthetix and Compound Finance.
It took DeFi just 2.5 years to reach unicorn category, compared with 14 for Apple, 5 for Google and 4 for Bitcoin, Lucas Campbell of Fitzner Blockchain Consulting wrote. Though it might be a bit disingenuous to compare an entire ecosystem with single companies or cryptocurrencies, $1 billion still means the space is now dealing with a non-negligible amount of value, after hardly being on the map just two years ago.
A flashy round number like this will inevitably drive attention from hackers. A big treasure chest means more people will be trying to loot it. DeFi hasn’t had any big hacks so far —no DAO moment yet— which might be unsettling, given how new and experimental the space is. But the 1B will also drive attention from investors, users, and builders, who will hopefully make the space stronger. With this, DeFi is getting harder and harder to ignore.
Ethereum Supercharges Finance
And here are three ideas on how it can move fundraising forward.
By David Iach, long-time crypto investor
Every once in a while a new innovation appears that acts as a catalyst for many other innovations. Think of electricity - which made it possible for us to create things like artificial light, refrigeration, washing machines, communication networks, computers and thousands more.
Most technologies aren’t like that. If we take the washing machine as an example, it’s certainly a great invention that’s very useful for washing clothes, but it didn’t lead to the creation of a considerable number of other technologies that wouldn’t be possible without it.
Computers on the other hand do fit that category. They weren’t just a nice technology, useful but limited, like the washing machine. Instead, they enabled the creation of numerous other technologies that wouldn’t be otherwise possible, like artificial intelligence, flight simulators, photo editing apps, Excel spreadsheets, and millions of other examples.
Not like washing machines
Ethereum is such a technology —like computers, not washing machines— and it might turn out to be one of the most important general purpose innovations for the financial sector.
Even though it’s a very young technology that is still evolving, Ethereum has allowed people to create a great deal of applications and protocols on top of it. We now have numerous types of stablecoins, tokens, securities, decentralized exchanges, lending services, non fungible assets, lotteries, automated contracts, money streaming services and so much more.
One of the most interesting aspects with all of these applications and protocols is how they can interact with each other, sometimes in ways that not even the people who created them could have foreseen. The term for that is composability, but I much prefer the more crypto native term, money legos.
I have previously written about how we can use such money legos to build a new mechanism for fundraising to better align the interests of crypto investors with those of crypto projects. I called it liquidity fundraising. I’ll describe it next, along with two other potential fundraising and investing models.
- Liquidity fundraising
Liquidity fundraising needs mainly two protocols to work: Uniswap, a decentralized exchange that enables anyone to earn fees by acting as a market maker, and Sablier, a protocol that allows tokens/money to be streamed.
Investors would send ETH (or DAI) to a smart contract that will issue them a proportional amount of the project tokens based on the value of their contribution. The ETH will not all go to the project/team that launches the token, but will be automatically transferred to a liquidity pool on Uniswap Exchange, along with a similar amount of tokens. This would secure instant liquidity for the token.
Projects would get their tokens steamed over time according to a predefined vesting schedule via Sablier, making sure their funding depends on what they deliver. The mechanism would also give project teams a predictable income.
- Influencer financing
This model could also be slightly modified and used by influencers to provide them with an income stream and also give their most valued followers a way to share in their success.
Influencers could issue a limited number of tokens that they distribute to their most loyal followers, and they would receive a portion of the tokens as well, which could be streamed in a predictable manner via Sablier. A Uniswap pool would also be created so that advertisers can acquire tokens to pay the influencer for their marketing services.
A more specific example here could be an Instagram influencer in a crypto related niche that could issue say 365 tokens to their most valued followers. The influencer would also receive 2 tokens, streamed every day via a smart contract.
Each time an advertiser pays that influencer, the token gets burned and taken out of circulation. This way the supply of tokens doesn’t grow indefinitely. At the same time, the influencer is still getting a predictable stream of income and her followers will benefit too, by helping the influencer grow their account and become more popular.
Even just a few months ago, such a mechanism would not have been possible since not every lego piece existed. But every time a new lego piece appears, new possibilities open up as well.
- No-loss investment
Take another example: PoolTogheter created a lottery where people cannot lose, only win. It works by letting people deposit Dai (a stablecoin pegged to the dollar) in a pool where it earns interest using a Compound Finance lending contract. At the end of the week one lucky person wins all of the interest the Dai in the pool accrues. Currently the size of the pool is around $1 million and the estimated prize for this week is $1,643.
What if we also made no-loss investment contracts? Instead of having the interest go to a lucky lottery winner each week, it would be invested in a crypto projects. A DAO could be used to decide which projects get funded.
At current rates, a $100 million pool would be able to make a $160,000 investment in a new project every week. All that without risking the money in the pool as just the interest gets invested. That’s 52 investments in a year.
Scratching the surface
Once again, we need the “legos” to build such a system. We need a stablecoin like Dai, we need a lending protocol like Compound Finance and we need a DAO to coordinate the investing part. All parts exist on Ethereum, but pretty much on no other blockchain.
Every time a new lego piece gets deployed on Ethereum, it opens new ways to use the existing ones and strengthens the entire ecosystem. This also builds a moat around Ethereum because it’s becoming increasingly difficult to attract projects to build on blockchains that lack most of those pieces.
While these three examples that I mentioned offer possibilities for experimenting with new ways of fundraising and investing, I am convinced that we have barely scratched the surface of what’s possible to build on a permissionless platform like Ethereum and as more protocols and applications get build, we will see a Cambrian explosion of financial applications in a very short amount of time.
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About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.