DeFi Banks - The Daily Gwei #279
DeFi protocols are railroads for finance.
Yesterday, Compound Labs announced a brand new product - Compound Treasury - and I think people aren’t paying nearly enough attention to it. In essence, this product aims to abstract away all of the complexity of DeFi and offer businesses & financial institutions a fixed 4% APR on their USD (by converting those dollars to USDC). Essentially, Compound Treasury will act as an easy-to-use frontend for DeFi.
As I’m sure many of you are well aware of by now, earning 4% APR on your dollars is amazing compared to the traditional finance system (where savings rate are commonly well below 0.5%). But accessing these yields in DeFi has been basically impossible for financial institutions due to the complexity associated with it (private key management, converting fiat to crypto, interest rate volatility etc). Compound Treasury abstracts all of this away and allows financial institutions to basically access this 4% APR by simply wiring USD to their Compound Treasury Account (yes, this is literally all they have to do). Of course, this whole process is more “fintech” than “DeFi” (because of the centralization involved) but ultimately the USDC is going to end up in a DeFi protocol (Compound) anyway.
Now, onto why this is a big deal. Firstly let me state the obvious - there are hundreds of billions of dollars in the world looking for yield right now and they aren’t getting it from the “traditional system” so a product like what Compound is offering is going to be very attractive to them. This means we can expect at least some of that money to flow into DeFi over the coming months via this product which regular DeFi users will be able to tap into (mostly to borrow USDC). I also think that this announcement will be something we look back on in a few years as the thing that started the institutionalization of DeFi - just like we look back on Compound’s COMP launch as what kicked off the yield farming craze.
This has always been the bull case of DeFi to me - the ability for individuals, companies, institutions - really anyone - to tap into the DeFi rails that live on Ethereum in any way that they want to. You can go the fully non-custodial route by using your own wallet and interacting with DeFi protocols directly, you can go through a centralized 3rd party that does all the heavy lifting for you (such as one of the many crypto banks) or you can of course put your funds into something like a Yearn vault that automates the yield farming process. In saying that, as much as we all really love the idea of controlling our own funds, many people don’t want to do this and I expect these people to just default to accessing DeFi via 3rd parties like Compound Treasury which is totally fine.
I truly believe that DeFi is going to usher in a new age of prosperity for the world by giving both individuals and institutions a much better financial system to take advantage of. Gone will be the days of having to deal with monolithic corporations that milk you for everything that you’re worth - they’ll be replaced by open source code written by amazing engineers from all over the world. How users tap into this code is up to them - they aren’t forced to go any one particular route - it’s a choose-your-own-style adventure.
And that’s why DeFi will win.
Have a great day everyone,
Anthony Sassano
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All information presented above is for educational purposes only and should not be taken as investment advice.
Have you seen what Orion Money are doing with creating access into Anchor (on Terra) to provide up to 20% on stablecoins? I'm not saying it's as seamless to the user as Compound but just highlighting in case you weren't aware. Love your newsletter, keep up the great work!