Alchemix — Prologue
As decentralised finance gathers pace, development teams are navigating their way through an open sea of possibilities, exploring an unspoiled world. It’s fascinating to observe how entirely new ‘value’ infrastructures evolve as they gravitate towards replacing legacy finance and its relatively narrow selection of retail packaged financial services.
One could imagine just how perplexed the uninitiated would feel wrestling with the numerous complex opportunities DeFi currently has to offer, even in its current state of infancy.
Some might argue that DeFi’s most primitive offerings are that of lending services. People who are accustomed to borrowing against the strength of their credit score might struggle to appreciate the existence of over collateralised loans. “But why borrow less money than you have to put in?” they may say. Whilst there are valid reasons for utilising them, the difference between these and traditional centralised loans is clearly significant. There’s plenty of room for evolution at both ends of the loan market.
Digging deeper into DeFi, we find a wide variety of yield generating options, through dapps and protocols. We can broadly categorise these as staking and yield farming. These are considered relatively low risk, however not completely. In traditional finance we might compare these to savings accounts and other ‘high interest’ products. It is quickly becoming common knowledge the yield available within these traditional products is lower than inflation, making these products all but redundant within the current climate. Even the decentralised options aren’t perfect — suffering from several key drawbacks (shown in the diagram below):
Challenges facing lending and yield generating services
Considering the numerous layers of friction presented by the current offering of both decentralised and legacy finance systems, it’s clear there’s demand for innovation.
One exciting property about innovation is that it doesn’t have to just solve problems. Sometimes it can create entirely new possibilities…