S1: Hello and welcome. I'm chubby Jim Singh from the money
S1: my team at CNN Decentralized Finance, or DeFi, has seen
S1: a sudden surge in popularity and is seen as a
S1: new way of doing finance. But what exactly is DeFi
S1: and what are the five things you need to know?
S1: If you are thinking of putting your money into decentralized finance?
S1: Joining me now is Shane I, head of R&D at Bybit,
S1: a cryptocurrency exchange and Xencor, and the co-founder of Bitcoin Exchange,
S1: which launched a first public bitcoin machine in Asia early 2014.
S1: She is currently the CEO of God, which provides easy
S1: and affordable access to cryptocurrencies. She's also the advisor to
S1: digital asset and DeFi fund Zen and Shane. Welcome to
S1: the
S2: show. Thank you. We're happy to be here.
S3: I shall be glad to be here.
S1: Zen, let's start with you. Help us define what DeFi is.
S1: The way I understand it is that DeFi uses technology
S1: to replace centralized institutions such as banks or financial institutions
S2: to decentralized finance is a long time coming on. What
S2: are the changes or stuff that we have been paying
S2: for in centralized finance? For example, we have been paying
S2: dearly for trust, for access to liquidity or access to
S2: counterparties and also on execution costs. And all these costs
S2: are almost eliminated in a decentralized finance world. So it
S2: is a finance world whereby execution costs and the minimal
S2: costs are kept with a very minimal.
S3: I do agree with Dan on this point. It's been
S3: a long time coming. I'm coming from a trader's point
S3: of view. So if you think about a lot of
S3: the investors or traders that go into crypto in 2017,
S3: if they wanted to get in and out of the
S3: crypto ecosystem, they had to sell DRC Bitcoin Etherium into
S3: fiat currency like US dollars or Singapore dollars. However, the
S3: DeFi ecosystem actually allows for a lot of this capital
S3: to sort of slosh around within the system, say earning yield,
S3: earning interest. So it's a natural complement to the original
S3: crypto ecosystem. So that's one of the reasons why I
S3: see it's popular right now.
S1: Speaking of popularity, DeFi has grown by leaps and bounds.
S1: There's over 70 billion US dollars of DeFi assets today,
S1: compared to just under a billion in 2019. What are
S1: some of the advantages of using DeFi?
S2: Some of the returns in centralized finance were eroded away
S2: by paying for commission or paying for just having SS
S2: or even sharing profits with another third party. But in
S2: centralized finance, you are getting more in control and the
S2: time and the speed of it. Sometimes kids enjoy finance.
S2: Just getting a cow could take months. And also what
S2: I love about DeFi is transparency, because if you know
S2: what you are doing or you're aware of all the
S2: protocols and the platform they're using to me is very transparent.
S2: Centralized finance for many years is a opaque box to
S2: a lot of people. You know what kind of products
S2: you might be putting into, but in terms of how
S2: your money flow back or how if you're a lender
S2: on board is a huge box in between which black box?
S3: I'm going to give two simple examples why there are
S3: some advantages to using DeFi. So number one, if you
S3: have been in the crypto ecosystem for a long time,
S3: investing or you do. Fixed income products are staking in crypto.
S3: You'll realize that the execution speed, as Zain mentioned how
S3: efficient the entire process is versus the traditional banking system.
S3: From a second perspective, DeFi allows very quick iteration and
S3: experimentation or financial products and even stuff that would traditionally
S3: be under the purview of the institutional sales and trading
S3: desk at the bank. If you look at overnight swaps
S3: or fixed income derivatives within a short span of a year,
S3: you've seen a tremendous development a DeFi space covering all
S3: sorts of products. I think it's a brand new way
S3: of looking at things, and definitely it has a lot
S3: of potential here.
S1: Shane beside the speed and lower costs. Another advantage of
S1: DeFi is also the possibility of higher yields. Why is
S1: that
S3: about the high used in DeFi? One of the huge
S3: reasons that I see, aside from taking all of the middlemen,
S3: is that the crypto ecosystem is still growing and a
S3: lot of people are bullish on the space. A lot
S3: of capital flows into the space. Often that capital comes
S3: in the form of U.S. dollars. You get a lot
S3: more growing demand for dollars within the crypto ecosystem and
S3: line up supply to meet the demand. With a market
S3: interest rate sort of clear, that is where we are
S3: currently seeing you look at the beginning of the year,
S3: it could be as high as over 10 percent for
S3: basic lending of stablecoins. And if you look right now
S3: to the market down a bit and probably people are
S3: slightly less excited, this is the beginning of the year.
S3: You're going to see race closer to, say, four percent
S3: per annum.
S1: DeFi seems to have several advantages compared to centralized finance.
S1: Let's talk about how investors can. Get in on the action.
S1: Where are the opportunities?
S2: One typical way where people have crypto and they do
S2: not want to sound crypto or they want to have
S2: a long term view on it. So instead of having
S2: the cryptocurrency in the coaches ticket and an momentum, I
S2: can see some common interest. You would lend it out
S2: and on the other site, somebody is actually in a way, borrowing.
S2: So there's a borrowing costs. You can see the platform,
S2: how much its borrowing costs and what is that you
S2: for you to start your crypto. So there is that
S2: one basket, which is like interest income and the other
S2: one is more growth kind of alpha kind of returns
S2: where you're actually buying into DeFi stock appreciation and you
S2: actually jump from tokens to tokens, depending on the statistic
S2: on looking at, or especially right now for the past
S2: few weeks when there's a price correction, you see you
S2: jumping up some downs and some price correction as well
S2: in other tokens and I think is in a way
S2: is good for the ecosystem. It's almost like a testing
S2: of what some of the insurance protocols are. You call
S2: some of what the position taken. Some crypto assets are.
S2: Liquid hates it when the price move, so is in
S2: a way testing the smart contract that you sign onto.
S3: The past few weeks, there's been a huge stress test
S3: to put it in banking terms for crypto ecosystems and
S3: especially DeFi. If you think about last year in March,
S3: there was a huge fall down the entire crypto sector
S3: where we saw bitcoin dropping more than 40 percent in
S3: one day. And during that time, one of the ticketing protocols,
S3: MakerDAO had his stablecoin Dai pegging from where he was
S3: supposed to be trading. At that point in time, DeFi
S3: wasn't that Brazilian, as it is today. The liquidations that
S3: we saw recently across the entire DeFi ecosystem, the absolute
S3: dollar amount is just larger than what we saw even
S3: in history. While many people will liquidate that, that was
S3: how the DeFi ecosystem was supposed to work, and we
S3: did not really see any contagion trends playing out. I
S3: think that speaks very largely to how far the sector
S3: has come.
S1: Does that mean that there's this close correlation between bitcoin
S1: price movements or cryptocurrency price movement and asset locked in
S1: the DeFi space?
S3: When you look at DeFi, for example, you mentioned 70 billion.
S3: Maybe earlier in the year, it was closer to 100
S3: billion plus a huge part of that because a lot
S3: of the collateral that are locked into DeFi protocols are
S3: denominated in bitcoin or ethereal.
S1: Just to be clear, you're referring to the total value
S1: locked in DeFi assets.
S3: Yeah. So when the dollar price comes down, obviously you
S3: see some drop in total value locked. But if you
S3: go beyond that, you can also see whether or not
S3: there are net outflows in terms of the actual currencies themselves,
S3: like bitcoin in. To answer your question more directly, just
S3: to give us an example of where someone wants to
S3: borrow stablecoins, someone deposits all his bitcoin into, say, a
S3: compound finance, and he uses debt as collateral, not because
S3: of the loans in DeFi over collateralized. He has to
S3: borrow less than what he put in in dollar value terms.
S3: So when the price of bitcoin drops down, then his
S3: collateralization ratio gets put at risk as well. So hence,
S3: you can think of it as margin trade in terms
S3: of the structure. So if the entire DeFi landscape is
S3: filled with loans like this, then a very quick shot
S3: down slightly could easily liquidate a lot of loans, simultaneously
S2: building onto watching it for some of the borrowers in
S2: a deep space, almost having options in a way on
S2: their asset. So when you look at the centralized finance,
S2: whenever this opportunity, you actually have a bigger impact on
S2: your asset value. So that's what happened. Same thing is
S2: in the DeFi space.
S1: So to recap, decentralized finance removes banking intermediaries all centralized
S1: exchanges from the financial system. DeFi is gaining popularity because
S1: it promises lower costs, quicker turnaround and higher yields. And
S1: there are multiple ways to get exposure to the DeFi space.
S1: For example, you could earn interest on the cryptocurrencies you
S1: loaned out, all by buying if I stopped. I've been
S1: speaking with Shane I from cryptocurrency exchange Bybit NZ Quant,
S1: the co-founder of Bitcoin Exchange and the CEO of Duty.
S1: Now let's talk about another opportunity for investors in DeFi,
S1: and that is yield farming. Shane, could you tell us
S1: what that is
S3: for yield farming? I think about it. Quite simply, if
S3: you think about a long time ago in Singapore, when
S3: we had when Grant coming to market, initially everyone was
S3: still taking taxis, when Grant wanted to bootstrap their user base,
S3: so they started giving out things like free. We can
S3: ride coupons, things like that that got a lot of
S3: people to start using a platform onto the station that
S3: we see today. So the DeFi space is similar to
S3: what we saw back then. Right. They are trying to
S3: incentivize users shit by, for example, you deposit liquidity into
S3: any of the protocols they got to give you their
S3: mint tokens in return. The only difference between this and
S3: the example that I mentioned just now is that some
S3: of the tokens that are given out say on the
S3: more blue chip type of DeFi protocols. This was actually
S3: probably more sustainable in the long run. It's not the
S3: same as, you know, you just want to spend a
S3: coupon it get your baby right, you want to use
S3: these tokens and accumulate them as a longer term kind
S3: of investment opportunity. So it really depends on the individual
S3: protocol themselves.
S2: I think, in short, is to just maximize the returns
S2: over the longest period of time because they are some product.
S2: You can get really high returns, but just a short time,
S2: but you know that you're going to be in it
S2: for the long haul. So over a longer period, time
S2: wise of maximum return that you could do.
S1: All right. Well, there are plenty of exciting opportunities in DeFi.
S1: There are also plenty of risks. Then what are some
S1: of the risks investors should be aware of?
S2: DeFi ultimately is built up from a series of smart contract.
S2: Same risks. We talk about the smart contract risk, the
S2: failure of what a smart contract is set up to do.
S2: It didn't do it in platform risk depends on which
S2: platform that you are building on. And of course, we
S2: still in a way have built into the smart contracts.
S2: Some of the counterparty risk and one of the biggest
S2: risks is the user risk. Not knowing what you are
S2: doing and not in a way killings on a crypto
S2: that you've just gone recognizing solvent to scan platform off scam.
S2: And especially where that just accelerated growth of DeFi products
S2: right now.
S3: Jane, yeah, I agree very strongly with the user risk
S3: and go the technical smart contract risk is quite well known,
S3: but basic security procedures, when you handle your own wallets,
S3: you have to know the difference between, for example, a
S3: cold wallet and a hot wallet. You have to know
S3: digital signatures. You have to know how to not expose
S3: your private key to the rest of the internet. That's
S3: where the risk report comes in. You have to put
S3: in more work in order to get these higher returns.
S3: This is a good exercise in responsibility in handling your
S3: finances
S1: just to pick up on scams. Then how do you
S1: recognize a device game
S2: for the longest time in a centralized finance, people linked
S2: higher risk to higher return, vice versa, when somebody had
S2: such a high yield DeFi. The first thought that a
S2: lot of people think that is it a scam? And
S2: then when they start seeing things happening for real, they say, Oh,
S2: it's not. So they end up being over positive about
S2: the whole space. Double digit returns is common, so they
S2: started to participate in some of the platforms or some
S2: of the products that give that. But ultimately, the whole
S2: thing is not a real product and not a platform.
S2: The whole thing is a scam is getting quite sophisticated.
S2: There are people who are involved in it didn't realize
S2: it later on, just like how the whole development of
S2: the whole crypto scene for so many years ago, when
S2: people started using Bitcoin, Bitcoin wallet, their scam wallet, that
S2: people download it from Apple Store a few years back.
S2: So now that DeFi platforms that are probably the beginning
S2: giving you the returns, but actually it's not real. My
S2: concern is I know there will be people losing a
S2: lot of money in the next one or two years
S2: or so.
S3: I do agree that a lot of the scams that
S3: we see these days, aside from the sophisticated ones that
S3: send mentioned, we are looking at some people who, you know,
S3: just launch new coins on new projects. They run ads
S3: online or on social media. You see, like, there's a
S3: lot of hype going for a new coin and the
S3: price is going up really fast. What happens shortly after
S3: day is that it turns out to be a pump
S3: and dump type of scheme. Right. So think of like
S3: Wolf of Wall Street kind of business model. I think
S3: it's quite important that if you look at DeFi protocols themselves,
S3: probably the first filter you want to go by is
S3: how much funds have been locked into the protocol and
S3: how long it's been around as long as this market,
S3: because of the longer ones, not the bigger, more established
S3: ones who have proven themselves, have a larger degree of
S3: decentralization governed by what we call a decentralized autonomous organization,
S3: or DAO. These ones are less susceptible to rock pools
S3: by the founders.
S1: And just to define a rug pool, this is when
S1: someone runs away with your money.
S3: Yeah, that's right. So a simple example is if someone
S3: creates a coin and he owns a majority of the tokens,
S3: so if he owns a huge chunk of the tokens,
S3: it's very easy for him to dump it on the
S3: entire market.
S2: Until we have seen that happening two three years ago
S2: during the ICO boom. So it's not a new scam
S2: where people raised or sought tokens based on white people,
S2: and they did some management of their tokens for money
S2: in pump up the price and then so on. And
S2: does it close of business
S1: with the risk of a boom and bust like we
S1: saw with Ikos, where we saw multiple scams and failed projects?
S1: Is DeFi here to stay?
S2: Definitely. Whatever happened seven eight years ago when we talk
S2: about blockchain is going to change finance or how cryptocurrency
S2: is going to be a new way of payments. You know,
S2: all the talk that we've been talking for almost a
S2: decade we're seeing right now and the speed of things
S2: that are changing and being innovated in terms of even
S2: products platform, how are being reinvested in a space is
S2: just even for us in the space. We are learning
S2: and trying to catch up as well. I see as
S2: maybe two or four years down the road, whatever we're
S2: seeing now would be very different from later. But ultimately,
S2: whatever that is happening in the IOC, the tradition of
S2: finance with the opposite, the trust, the accessibility, the high
S2: costs of this are being removed in the DeFi space.
S2: And with that, DeFi is here to stay. What has
S2: been lagging the past few years is somewhat of technology
S2: or the use of base is not big enough. But
S2: now definitely you look at what's happening in just the
S2: past few months or the first quarter itself. So my
S2: bet is definitely here to stay and to thrive.
S3: Just got to live with this one liners. So basically,
S3: assuming all the DeFi protocols from here go to zero
S3: and nothing comes out from this, the worst that could
S3: come out is is that the world has witnessed firsthand
S3: and you cannot unsee the kind of innovations that have
S3: taken place within the DeFi ecosystem. And there are a
S3: lot that has been improved on versus the traditional finance system.
S3: And at the very least, it can serve as a
S3: very strong, positive inspiration for building a more digitalized. Digital
S3: infrastructure going forward,
S1: for those with some skin in DeFi, let's hope they
S1: are left with more than just inspiration and also see
S1: some profits. Zain and Zain, thank you very much for
S1: being on the podcast.
S2: So thank you, everyone.
S3: Thank you, everyone.
S1: I've been speaking with Shayna from cryptocurrency exchange Bybit ends
S1: end quote. The co-founder of Bitcoin Exchange and the CEO
S1: of Beauty. Thanks for listening and catch us again on
S1: the next five things you need to know. Podcast by CNN.
S1: Money My Team.