Solving the Liquidity Puzzle of DeFi and Crypto Markets

From a financial perspective, the past two years have clarified the answer to one simple question:

“Who gets hurt the most when a crisis happens?”

We, the common people, are the ones who bear the brunt and remain on the shooting line till the crisis ceases.

The interest paid on the savings of a common man receives a cut, while the dollar they hold gradually dilutes in value. Why does this happen? Simply because of how traditional financial systems are designed to operate — centralized and opaque. 

Solving these concerns and paving a way forward is decentralized finance (DeFi) with its underlying blockchain technology. 

Corporates Bear the Financial Brunt too

Not only individuals, even corporates and institutions, are putting up with the many bottlenecks of traditional financial systems. Tedious processes,  paperwork, expensive fees, and lack of flexibility have been major concerns for corporates on the financial front. 

Seeking more flexibility and transparency, institutions are steadily adopting DeFi solutions to ease their processes. This has enabled them to borrow and lend easily, protect transactions, and maintain liquidity while relying on technology, rather than people.   

Moreover, DeFi is not an exclusive community. Hence, small-scale businesses also have been able to raise capital using DeFi platforms. All these make it imperative that DeFi will be the non-negotiable future of the business and commerce sector.

DeFi as an Investment Avenue

Investors’ interest is shifting from traditional investment avenues as they eye better opportunities presented by up-and-coming solutions in the blockchain space. Although in their infancy, these new investments have massive upside potential when compared to traditional strategies. 

DeFi has helped businesses cut out the middlemen such as banks, brokers, clearinghouses, and their associated fees. This improves their return on investment drastically. Also, the overall vision of ‘banking the unbanked’ is being realized with DeFi and crypto as their ease of access is unparalleled. 

Having said that, there is a need to acknowledge that blockchain technology and its application is at their nascent stage. Crypto, in general, can be easily compared to the internet of the 90s. This calls for a lot of user education as they transition to Web3 takes place.  

The Liquidity Puzzle of DeFi and Crypto Markets

Another prerequisite for a healthy market to evolve is financial flow and/or liquidity. In DeFi, multiple layers of liquidity are a must as more people jump onto the bandwagon. At an elementary stage, liquidity is the key requirement to embrace more users, more platforms, and even more activity in the crypto market. 

I had this idea about a year and a half ago. I sincerely believe that with the presence of spot and futures markets, crypto assets are destined to only move from one supercycle to the next (parabolic rise and crash). A secondary market that preserves the economic energy of the spot market is needed to build long-term sustainability (S-curve). 

Currently, there is only one settlement layer of liquidity, all new money, and returning investors buy from the spot market, and asset prices rise. When the enthusiasm slows, and buyers dwindle, the asset’s price is bound to fall since there’s only one place to sell currently. 

A secondary market is needed where assets can be purchased from the spot market and moved and traded in a decoupled manner. Where packages of assets can be traded, collateralized, and derivatives created without affecting spot asset value.

As soon as I had this idea, I started building. I was interested in creating a product that resembles the traditional bond market for ease of entry for traditional investors, but how these products work was completely rewritten for the digital world of decentralized finance. 

CryptoBonds are liquidity instruments that anyone can issue to themselves. The creation of the first-ever CryptoBond secondary market opened on November 1st, 2020. Since then many software upgrades have taken place including the recent introduction to a full P2P lending and borrowing interface. Much work is needed to build out the additional layers of liquidity. 

By incentivizing users to park their funds for a long-term in liquidity pairs, these bonds facilitate stability in DeFi. While the bonds and the underlying coins provide constant liquidity, the users who invest in bonds are able to increase the holdings of the native token. This monetizes the users’ long-term commitment to provide liquidity. 

This is an effort in line with my burning desire to help companies and investors bridge the chasm of opportunity with liquidity never being a compromise for financing initiatives. 

Ignoring DeFi Is No Longer An Option

Right now, the equation is simple - there is no ignoring DeFi’s potential and value proposition. Banks, middlemen, and centralized financial institutions will have no chance competing with DeFi’s growing arsenal of protocols and initiatives. 

No longer will layers of liquidity be built on overleveraged, opaque, and hypothecated assets. DeFi is inherently built on a strong foundation of over-collateralization and transparency. The shift is already occurring with DeFi products growing in popularity. Currently, the space is wide open for everyone to jump in and leverage its potential.