$1.1 Billion moving from Uniswap! Where is DeFi heading?

Where is DeFi right now?

Lets take a quick glance 2020 for DeFi, open-source projects like Uniswap, Compound, Yearn.finance and Synthetix have exploded in 2020. An impressive $13 billion has been locked into smart contracts, according to the data, providing liquidity for a plethora of financial services and instruments in lending, payments, insurance, derivatives and decentralized exchanges.

Lets zoom into Q3 of 2020, at one of the highest TVL players, Uniswap. Liquidity incentives on the Uniswap decentralized exchange have dried up, with the platform recently offloading 40% of its liquidity within a period of just 48 hours before the conclusion of its UNI liquidity rewards program on Nov. 17.We might be expecting to see up to $1.1 billion dollars’ worth of ETH being withdrawn from these four pools and either sold or reinvested into higher earning incentives.

The school of thought that many leaders in the DeFi community adopt in such said example is that that this shift does not matter much for Uniswap, as their sole purpose of raising initial liquidity was just to promote their DEX, which looking at TVL, we can see has been very successful.

“But where then is this liquidity going then Francis?”

For starters, to think that liquidity is going to dissipate and move back to CEXs makes little sense. It’s more likely the liquidity will slosh around DeFi to seek alpha. Why? The trustless, anonymous, easy access nature that comes with DEXs/DeFi works and because Centralized Exchanges have been far less secure , and to top it all off, you get to decide the future of the DEX and where and how its earnings should distributed back directly to the contributing community. That in a nutshell is the demand definition of ‘governance’ requested or often expected from the DeFi community.

To answer the question in short, ‘generally customers will flock to where the incentives are.’

But with that said there have also been fair share of ‘scammy’ DeFi projects in the scene over the last six months or so.

However, the technology as a whole has so much potential that consumers have not lost their confidence in it.

Throwing out ridiculous yield and incentives is a more often a good sign because you’re giving people what they expect from the product. It’s a win-win situation for the token as well as the ecosystem.

‘Francis! just tell me somewhere reliable to find these incentives.’
You can have a look at a farm that is just about to start their pre-sale. Emojis.farm (just leaving you the link, it’s your responsibility to research them yourself!)

Problems we face now.

Besides authentication, which basic research or audits can verify.

As a concept, DeFi truly looks like a win-win solution for those who already hold crypto, as they finally get to earn passive income from incentivization mechanisms, yield farming and lending, as for borrowers, they can benefit from a loan with terms that no traditional venues would ever offer.

However, when we look at the current space we see a major drawback for all parties involved is the occurrence over-collateralization which happens to account for price volatility.

Over-collateralization is a significant hurdle to reaching one of the main goals of DeFi: making financial services truly accessible. And the same problem occurs with stablecoins issued by DeFi protocols, as they require over-collateralization too.

Volatility of the collateral has caused losses totaling 6.65 million Dai (about $6.65 million) for Maker already and might cause more similar cases in the future.

Additionally, the lack of connection to real-world assets damages the DeFi space in a number of ways. First, it doesn’t allow traditional companies to borrow funds, as they can’t provide anything but crypto as collateral.
There are very promising players currently touching this segment, oracles, and Mintable which allow you to mint real world, or digital assets into the chain. But for this topic we are talking mainly about funds.

The second issue is the lack of real cash flows behind protocol tokens, meaning an absence of stability in the price of protocol tokens, which are typically the main instruments of incentivization.

Crypto uses have Crypto,
We work with Crypto,
We pay with Crypto,
We love Crypto,
Crypto stays in Crypto.

However, crypto is becoming a part of a global financial system, and in order to stay there, crypto must be connected to the outside world, and we will see a large shift of efforts towards this in the coming shift of DeFi.

The next Paradigm shift in DeFi

DEFI needs to be connected with real-world assets and exist in an environment where it can be used by real businesses, corporate clients, etc.

We all know there is a shift happening? How? To what?

Honestly, we will just have to wait and see where these market makers move the space to as consumers, but what we can expect to see is, definitely, a focus on infrastructure, relinquishing treasury management to the community, stricter audits, solving cash flow and collateral in the crypto, DeFi scene.

Shifting traditional financial products to the open-source and decentralized world drastically reduces the number of intermediaries required to attract financing, minimizing its cost. While in the current system, bond issuance costs may include fees paid to exchanges, payment agents, trustees, banks, lawyers and rating agencies.

Infrastructure providers will increase(largely in ETH)

Infrastructure that can bridge the gap between real-world assets and the DeFi ecosystem (here are some basic rules that will most deifnitely applied)

• The asset must be stable in order to solve volatility and over-collateralization issues.
• The asset must generate periodical fixed income in order to bring real-world cash flows.
• The price of a collateral asset must be determined in a transparent way based on several proven and recognized sources.

Cash Flow

Take Aave for example as a lending platform.
The use of real-world debt obligations will allow protocols to earn fixed periodical income, which can be distributed among investors. Basically, it will allow DeFi investors to benefit both from income generated by the collateral and interest payments made by borrowers.

At the same time, stable real-world collateral such as bonds reduces the risk of liquidation to a minimum, ensuring the stability of the protocol.

Besides some of the fore-runners linked above.
One company that is looking to add value into a current real-world disrupted Airline industry is Yucan.Finance.

They will allow users to compile their air-miles and flight points that they have painstakingly gathered from travelling, which typically are governed by a multiple of players in the airline industry into the chain. Which means you will eventually be able to compile all your miles from different airlines and have the ability to trade it or profit from it.

They will be launching their pools too by this month. Worth checking out.