I’m sure many of you have had a similar experience to me when describing DeFi to friends and family - that is, their immediate first reaction is to ask if it’s a scam. You may laugh but I totally understand this line of thinking because think about it - telling someone they can get 30% APY on their dollars in DeFi when they are getting <1% APY in their bank accounts does really sound too good to be true. Of course, we all know that it is true but this is also why DeFi can sometimes be indistinguishable from magic.

Element Finance @element_fi

1/ Introducing Element Element brings liquidity to fixed rate income, allowing anyone to buy BTC, USDC, and ETH at a discount. The transaction costs are low and there are no hidden fees or locked terms. We like to say “not locked yield, fixed yield”. Element Finance Raises $4.4M to Bring Liquidity to Fixed Rate Income and Interest MarketsThe Element Finance team has been focused on building and researching since we closed our seed round this past December and are excited to introduce new primitives to the decentralized finance…medium.com

March 31st 2021

75 Retweets345 Likes

Now the reason I’ve linked the tweet above is because it is what prompted me to think of this concept of “magic finance” earlier today. Element Finance is yet another DeFi “money lego” being launched soon that does something quite cool - it splits base asset positions (such as ETH, USDC) into two different tokens - the principal token and the yield token. What this means in plain English is that you can lock ETH into something like staking on eth2 and then be issued a token for your original ETH amount (the principal) and a token that represents the yield generated on that principal (the staking APY). From here, using the magic of DeFi, the principal token could be put to work in other protocols (such as put into a trading pair on an AMM or used as collateral within a money market).

Of course, Element Finance isn’t the only project in the Ethereum ecosystem doing things that look like magic. Another one that I follow closely is Alchemix which has a product that basically allows users to deposit DAI (the principal) into the yDAI Yearn vault, generate/borrow up to 50% of the principal amount as alUSD and then the protocol automatically pays down the debt using the yield generated by the yDAI vault. Additionally, users can then deposit this alUSD into a Curve pool to earn ALCX rewards and swap fees. All of this just seems like pure magic, doesn’t it?

There’s plenty of other examples I could give here but I wanted to focus on how all of this is possible and why it’s not something we see in the traditional financial system. The simple answer is that developers now have Ethereum, a neutral and open source platform, to build on. This leads to DeFi being “composable” which means that basically every app on Ethereum can talk to every other app and leverage each-other in any way that the underlying protocols allow. There aren’t really any silos that exist, there is no legal documentation that needs to be looked over or signed, there is no corporate process that needs to be cleared or anything like that - if you want to build an app that leverages a protocol on Ethereum, you can do it completely permissionlessly and from anywhere in the world.

I’m sure that I’m preaching to the choir here with all of this but I still think it’s worth reiterating why DeFi really is a new paradigm. Think about it - the existing financial system is so horrible and inefficient that we literally had to recreate the rails that financial apps are built upon to fix it. Though we didn’t just fix it - we made it at least 100x better and discovered a lot of new ways to build financial products in a secure and decentralized way. I believe this is why what we have built will continue to be indistinguishable from magic (to the old world, at least).

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.