NEWSLETTER #1: Here we go! DeFi and Digital Market Insights by ConsenSys Codefi
Codefi Newsletter sent 15 January 2020
In an internet pop up window far, far away you signed up to receive updates and insights from ConsenSys on digital assets and the crypto ecosystem. Since then, we have launched our integrated ConsenSys Codefi platform to deliver the next-generation blockchain operating system powering commerce and finance.
Before 2020 gets off to the races, we wanted to pick our heads up for air and give you the insights and updates highlight reel. We hope you will join us on the journey to come!
What even is Codefi?
ConsenSys Codefi is the blockchain operating system for commerce and finance, built to optimize business processes and digitize assets and financial instruments. We combined elements of digital assets and tokenized securities, crypto payments processing, enterprise finance blockchain, and the emerging frontier of decentralized finance to build a global software enabler for the new financial infrastructure. Think Twilio, for blockchain-based finance.
Codefi contains four core modules:
Assets: A platform to create, issue, and manage the lifecycle of digital assets, associated markets, and digital financial instruments on public or permissioned blockchain networks.
Payments: A platform to send, receive, and manage cryptocurrency payments and revenue within a single dashboard.
Networks: A suite of tools empowering anyone to utilize tokens and participate in decentralized networks.
Data: A data, analytics, and risk management engine for digital assets, public blockchain tokens, and their growing networks.
Within these different modules, we have started rolling out products to the market. Below, we feature a risk assessment methodology for decentralized lending protocols.
Project Highlight – DeFi Score Compare
The antidote to dumb mistakes in crypto markets and DeFi is transparency and data. What form does risk take when looking at decentralized software? Who is your counterparty? What does the system look like? We’ve been staring deeply at these questions at ConsenSys, which led us to create the DeFi Score.
DeFi Score is a methodology for assessing risk in permissionless lending platforms. The methodology analyzes a myriad of factors like smart contract security, liquidity risk, and collateral makeup. Can you guess which crypto lending and borrowing protocol currently holds the highest score? Hint: it rhymes with “pound”.
We recently updated the DeFi Score to include a centralization risk subcomponent, which examines the centralization level of a protocol. There are lots of questions that can be asked to determine associated risk, such as — do the protocol creator(s) have access to administrative keys that provide the power to distribute or lock funds? Are there timelocks? Does the team use a multisignature wallet? How decentralized are the oracles that the protocol relies on to obtain data?
The DeFi Score, similar to decentralization, is measured on a spectrum. The higher the risk, the worse the score and vice versa. To make protocol comparison even easier, check out the Compare application, which applies the methodology to live assets.
“Future of Finance” – Top 3 Predictions for DeFi in 2025
from Lex Sokolin, Global Co-Head, ConsenSys Codefi
Thank you for staying connected with ConsenSys and the Codefi newsletter! It’s great to meet you, and I am excited to share some strategic thinking about where the industry is headed.
As 2020 kicks off, ’tis the season for predictions and prognostications, so I figured I’d share some of my long-range predictions for the space in the next decade — (1) the role of Fintech champions like Revolut and Robinhood as it relates to DeFi, (2) the potential for national services like Social Security and student lending to run on DeFi infrastructure, and (3) the promise of pulling real assets into DeFi smart contracts and earning staking rewards.
Here’s to an outlandish 2020!
(1) Global Fintech champions like Robinhood, SoFi, Revolut, and Square will enter and win the crypto race as soon as the business model is established
There’s no obvious way for crypto aggregators to make money. They could try to scale to millions of users, and then charge a subscription fee. But they are missing the revenue streams that traditional financial institutions use to subsidize free services.
In DeFi, the economics of financial manufacturing are extremely uncertain — and because they are open sourced, I believe they will trend towards zero. Once you invent a software and launch it as an open source project, that automation is out in the world. It’s a protocol, not a company. Thus the user aggregators can be quickly copied and co-opted by incumbents. Look for example at the early “staking” competition between Coinbase and Binance, leading to an immediate price war around these returns, eating away a potential revenue pool for new companies. Further, actually touching client funds immediately makes these apps into regulated custodians or money transmitters or financial advisors, which means a lot of compliance cost for little upside.
On the other hand, there are already a half dozen mobile apps — all Fintech unicorns — that have licenses and millions and millions of users. Today, Square, Robinhood, Revolut and a few others offer crypto trading. This is most likely enabled with an omnibus account at an institutional, centralized crypto exchange. If the alphabet soup of DeFi projects becomes compelling enough for the users of those mobile apps, they will aggressively feature-compete. I also think the consumer Fintechs will out-race even the financial incumbents experimenting with enterprise blockchain, such as Goldman Sachs, JP Morgan, and Santander. If you raised money from SoftBank, you have to take on large risk, while the banks will take another 5 years to touch real DeFi.
(2) The software of Decentralized Finance will be replicated by central banks and governments and launched nationally
Either this is super obvious, or I am completely insane. Nearly every nation on the face of the Earth is trying to understand what it means to launch a Central Bank Digital Currency (CBDC). Two 2019 symptoms have caused this rush — Facebook’s Libra, and the Chinese digital yuan. Neither of those initiatives are a true cryptocurrency, in the sense that they are neither trustless nor permissionless. But both are inspired and motivated by Bitcoin. As a result, Sweden has hired Accenture to create the e-krona pilot, the European Central Bank is exploring a CBDC, and countless other meetings are taking place behind closed doors to formulate a response.
That said, when I think about government-backed financial infrastructure, I think about the Automated Clearing House in the US, the Faster Payments initiative in the UK, and the PSD2 regulation of open banking APIs throughout Europe. Similarly, national regulation often mandates student lending access through public-private entities, provides social security or pensions, and some form of medical insurance. That is to say — governments are definitely in the business of running communal financial infrastructure across asset classes. And if Bitcoin gets transmuted into CBDCs, perhaps DeFi can take the place of public services.
(3) Real world assets will be assimilated into the DeFi Borg cube through staking incentives, and would be a big win for the space
Look, I know you’re probably bored hearing about enterprise blockchain and Security Token Offerings. Neither has had the short-term impact that many people hope, and there is an impression that institutions continue to sit on the sidelines. While it is true that Santander issued a bond on the Ethereum mainnet, supply chain consortia like komgo and Vakt are moving trade at scale, Chinese tech companies are installing blockchain invoicing across large geographies — these developments have not excited the popular imagination. Similarly, STO and IEO volumes failed to match the hype of the ICO cycle. Yet this is a must-do step in the journey to economic adoption.
I can imagine a world where staking is the primary source of interest rates on the decentralized web. When your money is sitting idle, you commit it to generate cybersecurity for everyone’s financial infrastructure, and get paid interest. This could be a larger source of interest income, in the sense that it can absorb more funds for productive activity, than (1) a governance body setting an interest rate for issuing debt, or (2) a market interest rate for borrowing assets for trading. To reach that interest, you may want to commit traditional assets, from your brokerage portfolio, to your home equity, to even just a promise for repayment. This bridge may be built by the DeFi entrepreneurs. Or it may just be built by financial incumbents as they spin up institutional chains. The downside of a global, default risk-free rate is that it is a tax on those who are unaware it exists. When everyone else stakes, and you do not, it erodes your purchasing power through inflation. Sound familiar?
I hope you all had a wonderful holiday and thanks for reading. Stay tuned for more “Future of Finance” insights in next month’s newsletter!
Codefi In the Press
CoinDesk We Made No Progress, Other Than All the Progress We Made. Lex from our team discusses the impressive reality of the progress that DeFi protocols have made over the past 10 years across peer-to-peer trading, margin lending, and synthetic structured products, among other things.
11:FS Venture Bingo & Cryptomaximalists on the 11:FS Blockchain Insider podcast. Lex from our team talks with Simon Taylor about the latest news in blockchain, Bitcoin and Crypto, including JP Morgan’s autoloan provenance.
CoinDesk Security Token Offerings Are (Finally) Set for Takeoff in 2020. Emma Channing from our team explains that given the significant improvement in infrastructure technology, end-to-end functionality and compliance, and lowering costs make 2020 the year the STO phoenix rises (cough-Codefi-cough).
The Block Exploring DeFi trading strategies: Arbitrage in DeFi. The Block explores trading strategies like interest rate and cross-exchange arbitrage, and how our Codefi DeFi Score is making trading risk more transparent.
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Till next time,
The ConsenSys Codefi Team