Imagining A World of Honest Money: Bitcoin Comes to DeFi

Imagine, just for a moment, that we live in a world where money is honest. What does that even mean? It means that there would be something of value behind our money. What if you could actually take the piece of paper to the bank and exchange it for a real asset? What if money was not something created and enforced by governments and their militaries but instead was subject to the free market system…

As the Federal Reserve prints money to inject into our economy, trying desperately to keep the whole system afloat, people in the United States, as well as around the world, are starting to seriously question the value of government issued fiat currency. The US dollar only has purchasing power because people and governments around the world agree to accept it as legal currency. With the rise of cryptocurrencies not attached to any political entity, and economic superpowers like China looking to institute their own form of a national digital currency run off a blockchain, it’s looking more and more like traditional fiat currencies are on the way out. To be realistic this may be a 10, 20 or more year long transition, but the process is already underway. There is no place right now where this has become more prevalent than in the rapidly emerging DeFi (decentralized finance) space.

What is DeFi? DeFi is the lending of assets to individuals and organizations by other individuals, often together in a liquidity pool, without having to go through a third-party financial institution like a bank. Money is lent via a smart contract, meaning it is automated, which stipulates the re-payment terms and interest rates. The same smart contract also holds the original asset being put up as collateral. For example, if you have $10,000 worth of Ethereum and you need cash to start up a small business you probably don’t want to liquid your crypto or use it directly for this purpose. DeFi allows you to go to a DeEX (decentralized exchange), put your $10,000 worth of crypto into a smart contract and borrow $10,000, at a low interest rate to spend on business expenses or whatever you need it for. When you re-pay your loan, you get your $10,000 worth of Ethereum back… well kind of.

If Ethereum was worth $500 per token at the time you initiated the lone and in 12 months after you’ve repaid the loan each token is worth $550, you’d actually be getting back $11,000 worth of tokens. DeFi allows you to put your assets to work without actually spending them. This is great for people who want to hodl their crypto but also need to leverage it for purchasing power. This is also great for businesses who want to borrow money who may not be able to get a traditional bank loan for various reasons. Whether you’re trying to start a new venture and the bank doesn’t approve of your business plan, or maybe you’re in the medicinal or recreational medical marijuana business and can’t get a traditional loan due to federal regulations, the DeFi space is very attractive.

The most important aspect of this whole process is that the money that has been created for the loan is honest money. The loan is backed by a form of value. When a bank issues you a loan, they create more debt combined with spread sheet wizardry to make something out of nothing. Common sense would tell you that this system of creating money from nothing is not sustainable forever. Someone is also going to be left holding the bag when a loan defaults. That someone is the bank, then the government and ultimately the tax payer in the form of decreased purchasing power, more commonly know as inflation. If you entered into a DeFi contract by staking $10,000 worth of crypto assets and then default on the loan after only repaying half you will lose half of your stake. This effectively takes assets out of circulation, creating more scarcity and increasing value, a deflationary effect as opposed to an inflationary one.

So why aren’t more people getting involved in the DeFi space? If soooo many people are hodling their crypto why not put it to work? The simple answer is the risk factor. Taking a trusted third-party out of the mix and instead putting your trust into an automated smart contract creates a different kind of risk than borrowing from a bank. If there happened to be an error, bug or malicious actor able to manipulate the content of the smart contract one or all parties could potentially lose everything that they staked with little to no hope of recovering it. This makes a five or even ten percent annual return on your crypto start to seem like maybe it’s not worth the risk of potentially losing it all. Smart contracts are one of the best innovations to come out of blockchain systems but still present an element of risk related to their inherent programming languages and network security.

Blockstack is working to resolve these issues by building on top of the Bitcoin blockchain. By using Bitcoin’s already stable and established PoW system you create security and decentralization far superior than any other network. By instituting a new programming language called Clarity, many of the problems associated with existing smart contracts can be eliminated. Clarity differs from other smart contract programming languages in that it is not compiled and not Turing complete. This essentially means the language is both interpreted and decidable. In non-technical terms this translates to being easy to read and audit as well as predictable as you can tell exactly what code is going to be executed for any function. This simplicity ultimately means greater security. By increasing the level of security of the blockchain by building on top the Bitcoin chain, as well as using a programming language that is decidable and interpreted to help eliminate the possibility for errors and / or bugs, Blockstack is bringing increased security to the DeFi space.

As Bitcoin becomes used more and more as the asset behind DeFi what will this do to the value and price of Bitcoin coin? ? ?