In recent months we’ve seen an explosion of interest in DeFi projects accompanied by a surge in value locked in the space. In particular, automated market makers (AMMs) and overcollateralized borrowing/lending platforms have proven quite popular due to:
Their permissionless nature
Their ability to generate strong USD (stablecoin) yields for liquidity providers
The movement is particularly exciting because these new protocols effectively transform counterparty risk into code/protocol risk. Arguably you can never fully eradicate liquidity/liquidation risk, but we note that the popular defi protocols are quite well overcollateralized.
At any rate, the breakthrough is that a digital asset owner can now generate yield on her assets without losing custody of her funds. Interest bearing tokens can now be mobilized for use elsewhere in other applications, ushering in a new era of financial composability and layering. We believe this will prove to be a watershed moment in the history of financial innovation.
In the not so distant future, it’s not hard to envisage market participants shunning trust-based lending in the traditional markets for onchain (overcollateralized) platforms, as they become more digitally acclimatized and the protocols themselves battle tested.
