Dear bankless community:
Software is eating the world.
This 2011 article by Marc Andreessen describes how software-side companies are displacing traditional businesses and revolutionizing industries.
Amazon replaced consumer sales, Spotify replaced music, LinkedIn replaced recruiting -- all poised to displace incumbents that didn't build internet-native businesses.
Why? Software-side companies are faster, cheaper, and more convenient for users. In Marc's view, it is only a matter of time before every industry is replaced by software.
But that's not true for the financial industry.
Our financial system is still built on ancient infrastructure. Jim Bianco points this out in his podcast...Since the days of the telegraph in 1871, wire transfers haven't gotten faster and cheaper! 👀 (see what Jim has to say about our current banking infrastructure).
What about fintech? At present, what financial technology does is to improve the user experience of the existing system.
But DeFi changed everything...
Comparing PayPal's and Ethereum's money transfer networks.
Above is Paypal vs Ethereum...Cryptocurrency gets faster, cheaper, better. (see Dmitriy Berenzon's twitter thread that inspired this post)
Or take the lending platform as an example, MakerDAO is already profitable after 6 years of operation, while LendingClub is still recording losses after 15 years of operation.
Above is Dmitriy Berenzon's comparison of LendingClub and Maker.
DeFi enables the software economics of financial services.
faster. The cost is lower. better. finance.
Here's Dmitriy explaining why DeFi is eating finance, and some clues to inspire it.
- RSA
DeFi eats the financial system.
DeFi: Cloud Financial Services
Although in the past few decades,Software has been eating the world, but it has done a relatively modest job of disrupting financial services.
Because of entrenched incumbents, high switching costs, and regulatory concerns, innovation in the industry has largely revolved around channels (such as your favorite mobile banking app). This has brought about a nice improvement in the user experience, but the underlying value chain and cost structure is still largely based on systems developed in the 1970s.
DeFi applications are rebuilding financial services from the ground up, replacing humans with machines, paperwork with codes, and legal enforcement with encrypted execution.As a result, they are orders of magnitude less expensive to run than their counterparts.
Interestingly,This evolution in financial services is similar to that in the software industry; as software evolves from monolithic infrastructure and applications to microservices in the cloud, cost efficiencies are realized and new business models are invented.
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Traditional financial services are like software before the internet
Before the Internet, software vendors had high fixed costs and barriers to entry. In the 1960s, when computers were too expensive to purchase, vertically integrated vendors would invest heavily in developing and distributing software over their private networks.
For example, Computer Sciences Corporation spent $100 million (worth about $900 million today) to develop"Infonet", which is a mainframe network that provides (over telephone communication lines!) computer power and software such as brokerage services and hotel reservations.
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Fintech is like Internet-enabled software
Since the 1990s, the Internet has enabled a new model of software delivery; software no longer exists in standalone instances on people's computers, but instead lives in the cloud and is delivered remotely.
This in turn has led to the rise of software as a service (SaaS), an innovation in business models where software is licensed on a subscription basis. Compared to native methods,SaaS offers users many advantages such as browser-based accessibility, automatic updates, and a lower total cost of ownership.
Financial technology and Internet software are similar in that they both use emerging technologies to innovate products and business models. Chime uses online channels to expand its reach and reduce physical overhead for retail banks. Robinhood has adopted an alternative business model to commissions, namely"Payment for order flow"free"free"retail transactions. Transferwise circumvents the correspondent banking system, creating a two-sided marketplace that nets payments for people sending money in opposite directions around the world.
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DeFi is like cloud software
"modern cloud"Beginning with the launch of Amazon Web Services (AWS) in 2006, many applications were migrated over the ensuing decade.
Still, most of them are"instead of"instead of"the cloud"s application,This means they will likely still have monolithic and dependent modules that cannot be upgraded individually without changing the entire application.
Cloud applications, on the other hand, are architected from the ground up to run in public clouds like AWS. They leverage resource pools, fast elasticity, and on-demand services. They are also built on a microservices architecture and are designed as independent modules that serve specific purposes. Many applications today also run on serverless architectures, which allow developers to"pay as you go"Backend services are purchased on a basis.These design patterns can also be used in tandem to form so-called serverless microservices.
node"node"(i.e., computers) to provide these functions in order to earn protocol tokens and, in effect, become a fractional owner of that network.
don't confuse this with"Blockchain is not Bitcoin"confuses the logic of - Protocol Tokens for Incentives"third party supplier"necessary.
Source: Chris McCann
Therefore,DeFi realizes many benefits from the software and SaaS economy that financial services do not.Specifically, siled transaction processing and banking systems are replaced by a global blockchain and its associated smart contract and node infrastructure, resulting in significant cost savings. Additionally, applications benefit from instant interoperability and single sign-on (user's public/private key) after deployment.
This reduces the need for multiple marketplace infrastructure providers to build effectively identical systems (for example, there are about 100 ACH systems around the world), and for applications to build and maintain their own backend infrastructure.
This proposition is more attractive to application developers, because it is not for them to use"financial cloud"Fees, instead users pay miners/validators per interaction"gas". in other words,Transaction, service, and infrastructure costs are all bundled into a single gas fee.
Example of serverless architecture. Source: Badri Janakiraman. Badri Janakiraman
In addition, external service providers often perform the core functions of the application, such as liquidators on Compound and liquidity providers on Uniswap. In addition, once the smart contract is deployed, the service has no additional maintenance costs,So the app's marginal cost of acquiring an additional user is zero.
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Compare companies and agreements
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Source: Deutsche Bank
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Numbers are in thousands; Source: Lending Club, MakerDAO
In 2020, more than 50% of Lending Club's operating expenses may be due to personnel and hardware, software and maintenance costs.If the company had a leaner cost structure, it would likely be profitable.
While the majority of MakerDAO's operating expenses are due to capitation fees, it represents a small percentage of overall net income, resulting in a 99% profit margin compared to -60% for Lending Club. Note that these are not MakerDAO"full amount"image description
looking to the future
DeFi eats the financial system. Photo: Logan Craig
In the next ten years, DeFi protocols will be used as a platform for traditional financial institutions and traditional financial technology companies."Financial Microservices". These institutions will use DeFi as their backend infrastructure and will effectively be a distribution channel for various clients, demographics and geographies.
While DeFi protocols may add additional costs to enable them to further integrate with the fiat economy,But it will still be more efficient than current market structures and business models.
I am very excited to see a series of booming DeFi applications, which will serve as new infrastructure to provide various financial applications to people all over the world.
