IOTA Americas Meetup – DeFi Talk

Last Week’s Presentation

A few days ago, I had the pleasure of presenting at an IOTA Americas meet up. It was all about decentralized finance (DeFi) and the role it will soon play in the IOTA ecosystem. If you’d like to watch the recording, you can find it here: https://youtu.be/LJmdnR6QDcM

The energy within the group was truly fantastic, and I highly encourage everyone in the Americas to join. Meet ups take place every other Thursday at 9:00pm EST. You can choose to participate in the conversation, or just sit back and listen. Hit up gman214 in the #amer channel if you have any questions.

I decided to write this article because some people in the community wanted to learn about what we talked about Thursday, but didn’t want to watch an hour-long video, and I don’t blame them! So, the rest of this post will essentially be a transcript of what I presented. Enjoy!

Who is the TangleAccountant?

My name is Andrew Worden and I live in Traverse City, Michigan (United States). I received my master’s degree in finance from Michigan State University in 2014.

Since then, I’ve worked as an accountant for my company’s Canada subsidiary, then I took on our UK and German subsidiaries as well. From there, I transitioned into the corporation’s financial reporting analyst role. I was (and still am) in charge of all the data and reporting inside our Enterprise Resource Planning software. Today, I act as a financial systems administrator, helping to maintain the current system and architect new expansion opportunities.

I should note that I didn’t get into finance and accounting because I gave up on some other dream like a lot of people do; I’ve been obsessed with the art of managing money since I’ve been a kid. I once had to use my older brother’s social security number and bank account to open my first brokerage account because I was too young to buy stock. I even built an entire website, ad-free by the way, where I only write about finance. Just for fun.

So now that I’ve established myself as a truly insane finance fanatic, let me be very honest, and tell you that because of DeFi, I’ve personally never been more excited about finance. DeFi absolutely changed the game. Everything I thought I knew got thrown out the window, and I’ve spent the past several months re-engineering how I thought about yield, how yield is created, and how it can be captured.

What I’m looking to do is to take some of the concepts that have happened inside of Ethereum and apply them to the IOTA community and share them in real time.

The IOTA DeFi Academy

The vision of sharing this knowledge will come to fruition in the form of an entity called the IOTA DeFi Academy. As dapps start showing up on IOTA, people can visit this one-stop shop and check out these easy-to-follow tutorials. If you’re wondering, “Well, how do I actually use this DeFi system?”, the Academy has been set-up to guide you through intuitively. There will also be an extensive list of other things you’ll be able to do within the site – details to come. The final form of the academy will truly be centered around the power of community.

Check out this blog post to learn more: The DAO Vision

What is DeFi?

DeFi is short for decentralized finance. Finance is just how you manage money and we all know what decentralization is. But when I think of DeFi, I think of it as this all-encompassing term for the tools used to manage your money on the blockchain (or in this case, the Tangle). The tools here are dapps, and each one provides a different function. One is a savings account, the other is fixed income. You’ve got insurance, cool things like options and futures, and innovations like synthetic assets. The list goes on and on, but basically the days of cryptocurrency’s only function being sent from point A to point B are over. You can do some really cool shit with your digital assets.

Where Does Yield Come From?

(Credit to Zhu Su for this explanation of yield generation.)

Before I continue, I want to talk about yield. The yields in DeFi are crazy and everyone asks where they come from, and if they’re even real. Yes, they’re real. Yield comes from three primary sources:

#1: Demand for leverage – The demand for buying stable coins, futures, other tokens, etc. is astronomical.

  • Of course, demand for leverage is going to high for an asset class that’s gone up an annualized 100% over the past 12 years. There’s nothing new about leverage.
  • But to take out leverage, someone needs to provide collateral, and those providers need to be paid interest. Boom! Yield.

#2: Native tokens – An example would be supplying tokens to a lending/borrowing platform like the Compound protocol on Ethereum and earning COMP governance tokens on top of your interest payments. Those COMP tokens are worth something and add to your yield earning potential.

  • At 14:24 in the video, I go into greater detail on this subject.

#3: Protocol activity – Protocols like SushiSwap, Bancor, and the like pay a portion of the fees generated by the protocol back to whoever is holding their native token. It’s like owning equity. It’s sustainable.

How Does DeFi Start?

First things first, you need smart contracts. After that, human ingenuity takes over. “If-then” statements are very powerful. I wrote a post on the IOTA Discord a while ago about how DeFi started on Ethereum and how I believe IOTA would follow a similar trajectory. If we’re being real with ourselves, what can you actually “do” with your IOTA tokens besides send them from one account to another? There’s something like $4 billion in IOTA tokens waiting to be used. This same exact thing happened to Ethereum.

People had a bunch of ETH sitting in their wallets and they wanted to use it. Someone came up with a Twitter on Ethereum app where everything would live on the network and it would cost like 0.00001 ETH to send a tweet. So, if you have 1,000 ETH and you send one tweet, you still have 999.99999 ETH left. This was no good because people want to utilize their full balance. The exact same thing is true for IOTA. If I have 100 gigs, I want to be able to use my 100 gigs!

And in the Ethereum story, that’s when Maker showed up. Maker is a dapp that allowed you to mint a stablecoin called DAI. DAI is pegged to USD. It did this with various algorithms, but the main point was that you deposited, let’s say $10,000 worth of ETH, and you were able to withdraw $5,000 in DAI (without ever losing or selling your ETH), effectively morphing your buying power from $10,000 to $15,000… with nobody’s permission. The more ETH you had, the more power you had. You could turn around and use the DAI to buy things.

The Cambrian Explosion that everybody talks about, is real. Here’s the thing: I can tell you exactly when the Cambrian Explosion will start. It starts the exact moment someone releases a dapp that allows you to utilize your entire IOTA balance.

What Happens Next?

What may happen after something like Maker shows up is that a decentralized exchange is formed. Now, people with IOTA can trade with people who minted stablecoins. This means that the people who minted stablecoins to get more leverage, levered themselves up again by buying more IOTA, and the people who traded their IOTA for stablecoins are effectively exiting volatility. This all happens without sending coins to a centralized exchange. They did all of this without anyone’s permission. Being able to swap yourself in and out of the market on-chain is a key component of DeFi.

Next, a lending and borrowing platform may appear. The person who sold their IOTAs for a stablecoin would now like to at least earn some modest interest. They lend the platform their stablecoin in return for interest payments until they withdraw (and like I said before, you’ll probably get a lot of native tokens too if you’re in early enough… which we all will be). And if you remember from the beginning, someone is always willing to borrow that money to lever themselves up. Or who knows? Maybe someone is really bullish on IOTA in the long term and wants to remain exposed to the price appreciation but sees an opportunity in the space to make some protocol revenue. They can deposit their IOTA as collateral, take out a loan in a stablecoin, swap that stablecoin for the new protocol token, and begin earning money using that protocol without ever selling their IOTA. No taxable event happened, they’re earning protocol revenue from a new project, and they’re still exposed to the price appreciation of IOTA.

If you have 5 or 10 gigs and the price does a couple more of these insane moves like it did today, you don’t actually need to sell your IOTA to get some utility out of it. You would deposit them into one of the many DeFi protocols as collateral, take out a loan for half the amount (so you can withstand a 50% price drop without liquidation), and you can use that to buy things, and play around.

It should be noted that all of this is happening through smart contracts. No middlemen, no nothin’! I also want to take a second to stop and think about decentralized identity. This could really help IOTA develop a credit score system and drive down the high collateralization ratios needed in DeFi. This would make capital in the IOTA DeFi system more efficient than any blockchain. If the end goal is to create the most capital efficient system, through decentralized identity, IOTA becomes a very strong contender.

[I make a terrible joke about being in different time zones] So, what comes after all of that? Some boring stuff like fixed income instruments, futures, options, insurance, yada yada. We could talk for weeks about all the different financial primitives, but one thing I would like to highlight is synthetic assets – one of the coolest things in finance I’ve ever come across.

Synthetic Assets

You take a bucket of collateral, apply a payout function (that payout function is created from an oracle sending a price feed to the blockchain), and you can create literally anything. That sounds kind of weird, but if you want to buy synthetic crude oil on the blockchain and it tracks the price of crude oil and whatever you buy will go up and down based on the price of crude oil, you can. You want to do that with gold? Go for it. Tesla stock? Sure! If you’re a conservative investor and you’d like to invest in an S&P 500 index fund, you can create a synthetic asset for that, and become exposed to that price action, all on the blockchain.

Here’s a good clip of Hart Lambur and the Bankless guys talking about the potential of long tail financial assets that have only been made possible with the advent of DeFi: https://twitter.com/UMAprotocol/status/1371674563994476545?s=20

Final Thoughts

That was kind of the kicker moment for me. It truly begs the question (aside from regulatory concerns) once DeFi is up and running on IOTA, why would you ever use traditional finance to grow your wealth? Because literally everything in traditional finance is now on the Tangle. There’s no need!

After this conversation is usually when it clicks for my friends. Turns out DeFi isn’t just used by degenerate gamblers. It’s a fully functioning financial system that anybody in the world can access and use. It unlocks… so…. much… untapped potential. There are 3 billion underbanked people on this planet. If you can access that capital and allow them to use it more efficiently, we simply do not know what’s going to happen, and I just think that’s the coolest thing.

Live Examples of DeFi on Ethereum L1 and L2 (Starts at 41:30)

Jump into the video to watch me spend $310.52 in fees claiming rewards from a couple protocols.

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