Jul 2, 2021

Defi for Tradfi


This week, Compound announced support for anyone to get a flat 4% interest utilizing the Compound protocol by sending fiat, converting it to USDC, and letting the Compound "Treasury" entity manage the yield aggregation.

Compound is up 85% off its lows, and has been a clear outperformer in defi assets since the announcement.

Any profits from seeking yield, which they say will be strictly in stablecoins, will enable Compound to make a profit. Traditional finance entities can participate in Defi for astronomical rates (relative to what they're used to), without getting their hands dirty.

This is just the beginning of Defi for Tradfi. Traditional institutions can use the wrapper of sending money to another entity as their method of finding exposure without having to consider all the hard questions themselves.

KYC/AML, custody solutions, and whatever else they find challenging when onboarding to crypto can be managed by going through a traditional middleman. Then the Defi protocol's for-profit arm can provide the middleman services and skim some of the yield off the top.


Centralized exchanges are also getting in the mix. Coinbase CEO Brian Armstrong wants to wrap Defi into an app-store like experience. From Coindesk:

Armstrong promised to send more products to new international markets, while still working with regulators “in more established markets,” and that “any app built on decentralized crypto rails will be accessible to users of the Coinbase app.”

Whether exchange, protocol, or progressive tradfi institutions, the current (even suppressed) Defi yields are too attractive for these entities not to dip a toe.

Now, let's answer a couple of questions we got on Twitter! Let's start with an easy one, because I just talked about it some.

Janus asks what should an industry standard be for more realistic yields?

Compound didn't land on 4% for no reason. I think in most industries, carrying a 4% yield (high yield bonds, stock dividends susceptible to underlying asset movement) still carry significant risk. 4% on a stablecoin carries smart contract risk (which can already be insured, and will probably be more so over time), but little else. And folks I've asked think 6-8% will still be possible in a deep bear market. So if we average it down and say Compound could have a tight squeeze during hard times, 4-5% seems reasonable.

CryptoDetz asks what happens when wallets require KYC?

It's going to stink. I imagine the answer will be that a centralized exchange that offers fiat offramp will require the user KYC wallets that coins moved through. It sounds like it could get all kinds of hairy. There are so many questions, it could be a nightmare, depending on how draconian the regulations are (should they come). Crypto needs more people in Washington.

Leftsideemiri asks what's the biggest barrier to mainstream adoption now?

User experience. That's it. We need mobile first, easy to use self-custody solutions. Or, mobile first, easy to use custodian solutions that have access to Defi tooling (see Coinbase news above). It needs to be just as simple as Venmo, with superior features to both banks and fintech.

It will come.

See you next time!

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