How DeFi’s Cost Structure Could Put Wall Street Out Of Business

By August 20, 2021August 23rd, 20213 Comments

Will DeFi put Wall Street out of business? Dmitriy Berenzon recently tweeted about the various benefits of DeFi. Before reading about the benefits, let’s get to know a little bit about DeFi and Wall Street.

What is DeFi?

DeFi is a decentralized, global financial system built for the internet era, providing an alternative to a system that is opaque, tightly controlled, and dependent on decades-old infrastructure and processes. It provides you with comprehensive financial management and visibility. It exposes you to global markets and gives you currency and banking possibilities that are not available in your home country. 

Customers typically own and operate DeFi equipment, allowing anyone with an internet connection to access financial services. DeFi programs have already handled tens of billions of dollars in bitcoin, and the figure is steadily increasing.

Holders of various cryptocurrencies can use decentralized finance to: (a) earn interest by lending to liquidity pools that make loans to borrowers; and/or (b) borrow money by staking their cryptocurrency as security. Because lenders can earn considerably higher interest rates than traditional banks, Defi is becoming a more attractive alternative to traditional markets like Wall Street. 

Interest rates range from 5 to 13 percent depending on the platform and tokens used. Borrowers can also use their assets to wager on or against market swings, a feature of cryptocurrency trading.

What is Wall street?

Wall Street is only a few blocks long and less than a mile wide in the Manhattan borough of New York City, but its influence is felt all over the world. The name “Wall Street” was used to describe a small number of large independent brokerage firms that dominated the US investment business at the time. 

However, since 2008, the distinction between investment banks and commercial banks has blurred, and Wall Street is now the collective term for the various parties involved in the US investment and financial industry. This includes the largest investment banks, commercial banks, hedge funds, mutual funds, asset management firms, insurance companies, etc.

Because it is the trading heart of the world’s largest financial markets, Wall Street has a tremendous impact on the worldwide economy. The venerable New York Stock Exchange, the undisputed global leader in terms of average daily share trading volume and total market capitalization of its listed businesses, is located on Wall Street.

However, DeFi’s cost structure seems to take over Wall Street and put it out of business! Let us see some of the benefits of DeFi over Wall Street, as stated by Dmitriy Berenzon through his tweets.

Benefits of DeFi over traditional methods according to Dmitriy Berenzon

  • DeFi enables software economics for financial services. Traditional banks and FinTechs are unable to achieve this since they are still constructed on obsolete railroads.
  • What exactly is “software economics”? Provisioning more copies are free while building software is mostly a fixed-cost endeavour. To put it another way, there is no marginal cost for each extra user. Software firms can now achieve unprecedented growth and profitability as a result of this.
  • Banks and FinTechs do not have this luxury because of paperwork, manual processes, compliance expenses, and other factors. Because financial services are smart contracts that live forever in a permissionless financial cloud, they are non-issues for DeFi protocols.
  • In fact, the economics are much better here than they are with SaaS! While SaaS generates income, DeFi (and DApps in general) generates free cash flow since miners and validators pay for the infrastructure while users face the costs (in the form of gas).

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Examples

Dmitriy Berenzon also spoke about some examples of how powerful this new paradigm is in his tweets. Let’s look at them.

Things to keep in mind:

  • The comparisons aren’t really apples-to-apples.
  • Cryptographic data isn’t always correct (e.g. headcount taken from LinkedIn)
  • In an attempt to standardise the data, the data is for FY2020.

PayPal vs. Ethereum in terms of payments

With 0.2 per cent of the workforce, Ethereum was able to process 1.7x the payments volume 26% of the time.

Uniswap vs. Coinbase in terms of Exchange

Uniswap processed 30% of Coinbase’s volumes in 2020, with 27% of the manpower and 2.6 percent of venture capital funding.

Source

LendingClub vs. MakerDAO in Lending

After 6 years of operation, MakerDAO has turned a profit, whilst LendingClub is still losing money after 15 years.

Source

Some other ways in which DeFi’s Cost Structure could put Wall Street out of Business

  • Blockchain has achieved true immutability, thanks to the effective use of cryptography and consensus techniques such as proof-of-work. It is virtually impossible to modify any record on the blockchain network. 
  • Immutability, in addition to the benefits of decentralization, provides a promising assurance of security. Not Surprisingly, the blockchain’s immutability features safeguard the integrity of DeFi systems when conducting financial transactions.
  • Transparency is another prominent feature of DeFi, while immutability is crucial for the DeFi landscape to assure security. The cryptographic principles of blockchain also ensure that information is only documented when verified as valid. 
  • DeFi has also played an important role in the growth of peer-to-peer lending and borrowing solutions. DeFi allows for a more efficient and straightforward verification process in loan and borrowing applications. 
  • Tokenization is one of the most talked-about concepts in the blockchain world right now. Ethereum enables extensive smart contract capabilities, paving the way for crypto token issuance. Tokens can assist you in achieving a variety of functions. Real estate tokens may be able to assist you in achieving fractional ownership of tangible properties.

DeFi has accelerated its expansion in the first half of 2021, despite recent turbulence and a big pullback in May. The current trend of atomized services and financial management relying increasingly on technology, workflow management, and risk arbitrage for credit opportunities is strengthened by DeFi-based transaction banking. Permissionless access and a stronger emphasis on interoperability are two key qualities that DeFi brings to these developments. 

Traders used to be plentiful on Wall Street. Buying and selling stocks and bonds used to be done over the phone. They are now losing money on their trading operations and have laid off a large number of traders. This indicates that DeFi’s cost structure may surpass that of Wall Street.

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