DeFi Use Cases: A General Analysis

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DeFi Use Cases: A General Analysis

This is a summary of some information collected in a BitShares use case research for core team discussions during late 2019. This document is provided for reference per request of community members.

1. Crypto Lending & Borrowing

   1. Description: A DeFi lending platforms provide loans to users or businesses in a trustless manner, i.e., without any intermediaries, whereas the lending protocols allows participants to get interests on crypto coins and stablecoins.
   2. Pros:
      1. For Borrowers:
         1. Shorting Asset: A borrower can buy an asset and immediately sell it on any other portal or channel. Margin trading is also available.
         2. Borrow a utility: The borrower may decide to temporarily borrow a token to earn certain rights on the blockchain, e.g. governance rights, voting rights, etc.
      2.  For Lenders:
         1. Investment Reward: An investor can earn an additional amount from interest on lent assets by making a long-term investment.
         2. Earning opportunity from Stablecoin: Stablecoin issuers can have the chance to win incentives by distributing part of their revenue from floating interest rates collected on their bank deposits to users who support the circulating supply through these decentralized platforms.
   3. Cons:
      1. The high volatility of crypto prices makes the DeFi system not stable.
      2. Very limited cryptos are supported by popular platforms.
      3. Many DeFi targeted currencies are relatively centralized, which increased the systematic risk of all platforms.
      4. Smart Contracts are not 100% secure in most cases.
   4. BitShares Relevance:
      1. BSIP-70 proposes peer-to-peer lending for margin trading only. The mechanism aims to minimize the risk of default.
      2. Other more aggressive mechanisms may be applied if default is acceptable when interest is significant.
   5. Project sample:
      1. Dharma
      2. Compound
      3. Maker


2. DeFi Derivatives

   1. Description: A derivative is a contract between two parties which derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards and swaps. It is a financial instrument which derives its value/price from the underlying assets.
   2. Pros:
      1. Very flexible, especially suitable for Cross-chain friendly platforms.
      2. Extremely high potential value.
   3. Cons:
      1. High entry boundaries.
      2. Hard to obtain users on an early stage.
      3. May attract the regulator’s special attention since derivatives considered as very risky investment vehicles.
   4. BitShares Relevance:
      1. No direct connection to external assets is provided. Bridges, OTC traders, and HTLC are only channels.
      2. No flexible smart contract system. Hard to define business logic in blockchain.
   5. Project sample:
      1. Synthetix
      2. UMA


3. Asset Management Tools – DeFi Wallets

   1. Description: Asset management tools act as a custodian but is a specialized financial institution that safeguards a user’s financial assets and is not engaged in any traditional commercial or banking services. In DeFi space, asset management tools include wallets, apps, and dashboards for managing user assets.
   2. Pros:
      1. One of the most high-frequency tools in the crypto world, very profitable.
      2. High user stickiness.
   3. Cons:
      1. Very hard for users to adopt at the very beginning. Too many pre-consolidation steps for new users.
   4. BitShares Relevance:
      1. BSIP-57 proposes to allow third party balance “managers” and will enable third party asset management services.
      2. Smart contract system will add more flexibility to asset management products.
      3. DAC-controlled external assets will be a huge plus.
   5. Project sample
      1. Abra
      2. InstaDApp


4. DeFi Insurance

   1. Description: Generally speaking, decentralized insurance acts as a safety net for the DeFi ecosystem. From wallet insurance to smart contract insurance, the comfort of knowing that your assets are protected in the case of a bug or a hack creates peace of mind for crypto investors.
   2. Pros:
      1. A “safer” investment environment helps new investors to easier adopt the Crypto investment products.
      2.  Insurance products are standardized contracts that can be used among different cryptocurrencies, which may help the platform users to increase dramatically.
      3. The product may be used in the non-crypto world.
   3. Cons:
      1. May not have government or sufficient funding support when experiencing black swam like events.
      2. The DeFi Insurance platform itself may need a centralized insurance support.
   4. BitShares Relevance:
      1. The same, more flexible smart contract is needed.
      2. Smart Assets, like bitCNY and bitUSD could be used to facilitate insurance modeling and payment.
   5. Project Sample:
      1. Nexus Mutual