Positive Sum DeFi: Shifting the Paradigm of Finance and Beyond

Most financial systems operate as zero-sum games, even on-chain; lending protocols are a great alternative to traditional finance, but they still pit customers against each other.

While some of the core value prospects typically associated with crypto are transparency and more direct control over one’s finances, many within crypto/DeFi are met with many of the same problems as traditional institutions. Protocols and exchanges can obfuscate their reserve funds or their means of revenue and expose consumers to greater risk with no clear benefit to the consumers.

Even when protocols operate with complete transparency, it is still common for them to operate as zero-sum protocols. Projects in the DeFi space often require consistent growth in order to operate as intended, such as Terra Luna which imploded when users attempted to redeem UST for their Luna, causing a bank run. While many were able to rake in profits during the hay day of Luna, those profits came at the expense of later users.

Zero-sum protocols

Zero-sum systems have become rife within DeFi, even within prominent and well respected protocols. Rather than the direct fault of creators, the widespread integration of zero-sum systems can be attributed to the influence of traditional finance institutions, where competition is incentivized over cooperation and traders are always looking for a leg up on their peers.

Even lending protocols, the bedrock of DeFi typically operate as zero-sum games. Most lending protocols follow a familiar model where the yield provided to incentivize lenders comes directly from the interest charged to borrowers. This widespread model has a major disadvantage; it creates a zero-sum game where borrowers have to pay more for lenders to earn more. Lenders want 5%+ APY on their deposits, but borrowers want affordable loans.

Though they offer users more direct control over their finances than previous systems, the typical model of lending protocols still leaves something to be desired. DeFi was meant to unshackle participants from the often predatory schemes of traditional finance, so while lending protocols are a tremendous step up, there’s still much to be done to improve the experience for lenders and borrowers alike. The advent of positive-sum DeFi bridges that gap.

Positive-sum DeFi

Positive sum mechanics can be achieved through a litany of methods. Some prominent examples would be the solarpunk and Regenerative Finance (ReFi) movements. While technology has long been a zero-sum game with our natural resources, from drilling for oil to power automobiles to mining for resources such as lithium and cobalt to power our devices, we’ve benefited technologically at the expense of our planet. The Solarpunk and ReFi movements are flipping this model on its head by highlighting the benefits of more sustainable practices and blazing the trail to make such practices more attainable for individuals and corporations alike.

These efforts offer prospective large-scale solutions to the zero-sum mechanics of technology; they provide hope for continued innovation without sacrificing our environment. While exciting and promising, these goals remain rather lofty. Protocols such as Sturdy are helping to turn the tables on a more individual level. Sturdy claims to be the first positive sum lending protocol; instead of relying upon charging borrowers to acquire the funds to incentivize lenders, Sturdy stakes deposited collateral (stETH and various Curve LP tokens) and distributes the yield to lenders. This means lenders get high APYs while borrowers are able to take out loans with low, often 0%, interest.

The permissionless nature of DeFi allows teams from across the globe to work together with the shared mission of bettering the space. As the space continues to grow, we can only hope founders continue to work to better the world around them rather than merely pumping their own bags. Its important investors support worthwhile projects such as the Solarpunk or ReFi movements and even individual protocols trying to make a difference, such as Sturdy. Positive-sum projects allow users to shift how they think about finances and global operations while still making a profit.

As DeFi continues to grow and innovate, it will be interesting to see how founders manage to turn more systems positive-sum. The mechanics of Sturdy and the aspirations of SolarPunk and ReFi offer a glimpse at how the space could be made more positive-sum at the protocol level as well as at the industrial level. While these projects are all very exciting, hopefully, they will help initiate a greater movement within the industry to consider the ultimate motivations behind releasing a project, leading to more positive-sum projects in the near future.