There is now over $14 billion that has been locked into Defi just in the last year.
For participants, this open finance system is a winning opportunity as it unlocks passive income in ways unheard of in traditional finance.
What is Defi?
As a primer, let’s start in a familiar mind space. We all know what banks are. Banks are CeFi (centralized finance) organizations that offer a variety of financial products. Checking, Savings (with yield), CDs/Money-Markets, Investing (stock exchange) and Lending. The highly regulated banking industry consists of huge processes and people to operate these products. Designed to generate profit, the larger portion of the profit from these products goes to the bank itself, leaving very little incentive for the people using the bank’s products.
Enter Defi - Defi (decentralized finance) is an umbrella term for blockchain-based organizations that offer a variety of financial products. Similar to a bank, these products include Checking, Savings (with yield), CDs/Money-Markets, Investing (crypto exchange), and Lending. A significant difference between these blockchain-based products is their unique ability to be fully automated. This means there aren’t huge personnel costs, physical infrastructure, armored trucks, etc… to compensate when profits are generated. As a result, the large profits go back to the participating users of the Defi products creating remarkable returns.
When new defi platforms launch, they have a unique ability to scale fast. This is largely due to a savings product called “yield farming”. Yield farming, Liquidity mining & Liquidity Providing are fundamentally the same concepts and by far the most interesting phenomena in the world of defi.
Liquidity + Volume are crucial in crypto & defi
When someone has a token (coin, smart contract), the ability to sell that token is crucial. Regardless of the token’s purpose, there must be a place to sell or token will largely have zero worth. Volume also plays a significant role. If a person wants to sell $100 worth of tokens and there is only a buyer market of $20, you have an issue.
This makes yield farming (or liquidity mining) an essential feature of defi. Liquidity mining is based on two very important concepts in the world of crypto: liquidity and mining. Liquidity is the availability of coin/token buyers in a given platform, essential for the creation, growth, and expansion of a platform. When someone wants to sell $100 worth of a token, the liquidity (buyer market) needs to exist.
Mining in crypto references the participation in an activity that makes resources available in the system which results in the reward-driven creation of new tokens or coins.
In Defi, the process of yield-farming/liquidity-mining issues incentives (new tokens) to participants providing liquidity deposits to the defi platform.
While a traditional CeFi (bank) savings account will earn those who provide deposits 0.8-0.9% APY… a defi savings account (typically called a yield farm) will yield 10-200% APY.
This process, which is highly incentivized and rewarding has created a gold rush in the Defi community.
What are DeFi’s drawbacks?
The greatest drawback of defi is volatility. Since these defi products are fully automated there is no way to stop losses that can be created.
Let’s look at the case of a loan, which is one of the most used products in defi. With huge swings in price targets, crypto that was used for collateral can drop to an amount less than the loan, exposing the loan to loss or forced liquidation penalty fees. Given crypto is so correlated to each other, a swing in price could result in cascading losses across the board.
How does Real Estate fix this?
Crypto coins and tokens are largely correlated. Bitcoin enters a bear market, many of the correlated coins go bearish. The value of Ethereum’s ETH goes down, much of the tokens powered by that system go with it.
This is with the exception of stablecoins.
Stable coins are coins backed by stable assets 1:1. Most common examples include USDT or USDC. These tokens are fundementally set to always be $1. For every $1 USDC or USDT in circulation, there is a bank account with $1 USD (standard dollar). Some stable coins extend to gold. For instance PAXG. Every 1 PAXG is equal to 1 ounce of real gold, bonded and kept in a safe. What is noticeably different with PAXG is, as gold prices change, so does the price of PAXG.
As markets change, crypto owners move around buying and selling different tokens and coins to maximize profits. In a case where a token’s value is going down, a trader may move into a stable asset to protect themselves from losing too much, by temporarily selling token A to buy a stable coin.
Enter the world of real estate.
Real estate is an asset that continues to appreciate over time. Specifically rental income in real estate: it delivers a consistent yield. The price of real estate moves at a target fully disconnected from crypto.
Utilizing the liquidity created in the launch of HaloDeFi, real estate can be locked in a crypto vault, in such a way that its dollar value is bonded to a different token securely in a defi loan. (e.g. The tokens representing the real estate property and it’s deposit address for it’s rent payments are placed in a vault, collateralizing newly issued tokens via a lending instrument — one we call a StableBond.)
Real estate proves to be the ultimate real-world asset to introduce to DeFi as it meets the most important criteria for bonding.
Real estate’s value and the market is a regulated, stable, predictable, and transparent system mitigating manipulation risk.
Real estate rent introduces new, outside liquidity consistently to the pool/network on a fixed time basis. New yield produces transactions, which create deeper network effects in fee incentives given the community earns the fees.
Real estate is stable, solving for volatility and over-collateralization requirements of automated lending products. Head on solve for impermanent loss.
People have tried crypto real estate, why is HaloDeFi different?
Many attempts to bring real estate to the blockchain have been mediocre at best. Typically firms use REITs, require accredited US investors or have high minimum contributions. We’ve taken a unique approach coupled with market shifts in crypto, specifically defi which improves the governance, reduces the friction, and capitalizes on changes to US securities law. Rather than invent processes from the ground up and experiment, we’ve tapped the essence of blockchain innovation, iterating on proven primitives — using our unique access to realize our vision.
Later in the series, I’ll speak to how the process works, legally and step through some of the standard operating procedures.
Ryan Hickman is a managing partner of EPIC.ai, a venture studio — building and investing in frontier technology. Ryan leads strategy and EPIC’s investment into HaloDeFi.
Stay tuned for more of the series which dives deeper into HaloDeFi’s strategy and launch, including:
How to bring real estate to defi legally
How to operate remote/decentralized real estate holding entity
The notion of a new DeFi primitive: the stable bond
Streamlining access to DeFi powered real estate
In the meantime, tell your friends!