Hello defiers! Today Max Tarasenko of Soda Foundation, a platform that lets users borrow Dai against Bitcoin, makes the case that DeFi users shouldn’t overlook Bitcoin for two main reasons. First, historically, the biggest cryptocurrency’s return has beat the average interest rate earned on decentralized platforms. And second, the number of DeFi users is so small today, that it’s too early to focus on connecting lenders and borrowers. Instead, first on any team’s minds should be to grow the addressable market. And Bitcoin also fixes that ;)
Holding Bitcoin is as Important as Earning Interest in DeFi
By Max Tarasenko, co-founder and CEO of Soda Foundation
The Truth About Misbalance and Narrowness of Today’s DeFi
“DeFi, not Bitcoin” - zeitgeist of 2019 in the crypto community. People share their enthusiastic opinions with each other on the future of the growing industry, compare the lending rates, rebalance their baskets and create smart contracts which will find and execute the best lending deal for you. I can agree with those who say that earning interest is the killer-app of today’s DeFi. But let’s stop for a moment and have a look at the truth.
When we are analyzing the supply and demand sides of DeFi, it can be observed that there are way more lenders than borrowers. Zac Prince, CEO of BlockFi, has shared his opinion on this topic during his conversation with Frank Chaparro on The Block’s podcast: “The interest account is much bigger. So roughly 10% is what we’re seeing right now so out of every hundred people that are on the platform, all hundred of them are interested in earning interest and about 10 of them will borrow money at some point in time”.
There is only one borrower out of ten lenders in DeFi today. If we agree with these estimations and extrapolate them to DeFi as a whole, there will be a x10 misbalance between the supply and demand sides. It is better for all of us to take into account that the main (if not the only one in terms of significant amounts of capital borrowing) user profile of the borrower today is a trader who uses the loan as a leverage or for shorting crypto assets. It is such a narrow group of financial agents who act as borrowers that conversations about the mass-adoption may sound like schizophrenia.
If we assume that DeFi’s most attractive part is earning interest, then it will be worth mentioning the effective (real) interest rate that the lenders can expect after lending their capital. In the Crypto Credit Report Q2 2019 Graychain calculated that $4.7 billion has been lent out over the history of the sector. But wait a second before yelling out: “Billions! That’s huuuge!” because only $86 million has been earned back in interest. The effective interest rate is only 1.8% APR, not 10%+ APR that everybody expects to effortlessly earn in DeFi.
There is a number of reasons why the interest rate differs from the expected. First, many of the lending platforms have just launched in Spring 2019. The traction is too low yet. Second, interest rates are variable. For example, today you can lend your capital at 10% APR, but tomorrow the lending platform’s algorithms can cut the rate, say, to 7% APR. Third, we should keep in mind that institutional crypto lending is different from the retail/DeFi and this can also affect average interest rates.
In case we can accept and live with this truth, we will understand that today’s goal of DeFi is not about connecting 1 billion users who will start lending (to a couple of thousands sophisticated crypto assets traders?) and borrowing (who and why will be borrowing tens of billions of dollars in DeFi today?), but to expand in different directions and work on growing the total addressable market. How can we do that? Well, how about Bitcoin?
Three Long-Term Macro-Assumptions
Let’s focus on the “old-school, unsexy and slow” Bitcoin. It can be valuable for every early adopter of DeFi to be able to estimate the alternative expenses of overlooking the other options that we have on the market today.
Here are our three long-term macro-assumptions about Bitcoin and DeFi.
Bitcoin’s Average Daily Value Change (+0.58% in 2019) Can Be as Important in the Long-Term as Earning Interest in DeFi Today.
If you are holding Bitcoins, you have earned +0.58% yesterday. Today you will earn +0.58% as well. Tomorrow you will earn +0.58% more. And we don’t even have to check the price. Wait, what? Here’s what I’m talking about. It can be an unfair advantage of yours on the market to keep in mind the Average Daily Value Change metric to go through the high volatility periods without feeling fear or greed. If you are expecting to earn +10% APR while lending your capital in DeFi, you will be receiving about +0.0274% a day in interest.
The first assumption is: don’t underestimate Bitcoin’s daily average value change (+0.58% in 2019) while looking for the best lending rates in DeFi (+10% APR will give you +0.0274% a day). Holding Bitcoins can potentially beat the best lending rates in DeFi. Remember, that no one can guarantee you that this metric will stay the same (+0.58%). Actually, it will be constantly changing. Nevertheless, today Bitcoin’s ADVC is 21 times higher than the hypothetical daily interest in DeFi.
Use Arithmetics First, Linear Algebra Second: The Supply and Demand Sides of Bitcoin.
I bet that you are using a number of ultra complex analytical instruments in your own approach to the analysis of crypto assets value. Realized market cap, NVT ratio, technical indicators and many more. We call it the linear algebra approach.
There is one more: the arithmetics approach. The thing is that we can be sure about the total supply of Bitcoin. We know that it is 21,000,000 BTC. Alright, that was easy. Let’s continue.
There are about 7,700,000,000 people living on the Earth. Remember, we are talking about the long-term perspective. The second assumption is: if you are holding 1 BTC, you can be in 2 of 1000 richest people in the world in Bitcoin equivalent. Imagine a crowd of a thousand people. Only two of all these people will be owning a whole Bitcoin. We were talking about the supply and demand sides of DeFi. The deflationary nature of Bitcoin and the fixed supply are huge advantages of BTC as an asset. Selling Bitcoins today means that someone of these two richest people in the world in Bitcoin equivalent is buying from you.
Understanding Market Cycles and Forgetting About Today for the Sake of Tomorrow.
This year on my flight from China I’ve read a book that I can recommend to anyone who wants to deeply understand the timing that is crucial for the early adopters of DeFi and Bitcoin holders. The book is called “The Most Important Thing Illuminated. Uncommon Sense for the Thoughtful Investor” by Howard Marks. Mr. Marks has some really valuable insights about the markets that he freely shares with the readers. His personal net worth is $1.91 billion and he manages the Oaktree Capital Management fund with $122 billion assets under management. What can we learn from Howard Marks?
He writes about the Awareness of the Pendulum. Mr. Marks compares the mood swings of the market to a swinging pendulum. While it may swing from one extreme to another, he observes that it also swings from risk aversion to risk tolerance, from greed to fear, optimism to pessimism and from low prices to high prices. Shortly speaking: markets are cyclical. Starting in April 2019, we are entering the next market cycle. Nobody knows what can happen with DeFi, Bitcoin and the market as a whole during the next 12-18 months. But keep in mind our third assumption: understanding market cycles (macro) can help us hold Bitcoins and lend the capital in DeFi without feeling stress about market volatility (micro).
Our mantra at SODA Foundation is never sell your Bitcoins. We help the early adopters of DeFi to borrow DAI at 7.9% APR with Bitcoins as a collateral. We believe that enabling Bitcoin as a means of collateral will add billions of dollars to the total addressable market of DeFi. The road ahead is long and hard. But together we will #DeFine the future.
There are ten times more lenders than borrowers in DeFi today.
The main user profile of the borrower with significant amounts of capital borrowing is a trader who uses the loan as a leverage or for shorting cryptoassets. Such a narrow group of financial agents who act as borrowers won’t lead to the mass-adoption.
Effective interest rate that the lenders earn in DeFi today:
+1.8% APR ($4.7B has been lent out, $86M earned in interest).
Bitcoin’s Average Daily Value Change in 2019: +0.58%.
Lending APR in DeFi: +10% (+0.0274% daily).
Bitcoin’s ADVC in 2019 is 21 times higher than the potential daily returns in DeFi.
Total Supply of Bitcoins: 21,000,000 BTC
People living on Earth: 7,700,000,000 people.
While owning 1 BTC, you can be in 2 of 1000 richest people in the world in Bitcoin equivalent.
Understanding that the markets are cyclic and feeling its current state is crucial for having an ability to make wise long-term decisions (holding and accumulating Bitcoins, earning interest in DeFi and calculating the alternative expenses).
Today’s goal of DeFi is not about connecting 1 billion users who will start lending and borrowing cryptoassets, but to expand in different directions and work on growing the total addressable market value.
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