DeFi Series: August market frenzy prompts search for alternative finance models
The month of August presented unusual market activity as markets closed on the 31st: “the hottest August since 1986,” as reported by the Financial Times.
The upwards move in the market was brought about by a combination of rising stock prices of the so-called ‘mega-caps’ –technology companies (Amazon, Alphabet, Google, Apple and Microsoft) whose services have benefited from the ‘new normal’ working from home – and government-backed fiscal stimulus in the US and the EU.
One of the major gains was seen in the shares of Amazon, the American multinational focused on e-commerce and tech services as the company reported its sales were up 40 percent during Q2 2020. iPhone maker Apple has also seen outstanding results during the past month, reaching a market cap of more than $2 trillion, surpassing the value of all the members of FTSE 100, the UK’s top share index.
Despite the seemingly positive outlook, last month’s results prompted a fair amount of scepticism — after all, the world is still going through a pandemic and the economy is struggling to adapt to this new reality. This indicated that the apparent financial market boost was not in fact spurred by healthy economic activity but is in reality a market bubble which will eventually burst.
A cautious sentiment had market watchers looking for alternative investment models as interest rates reached historic low levels, making the current market seem like an unreliable option. Many, tiring of the old systems, are embracing innovative technology models and their disruptive potential.
The current finance model works very well for very few. Despite claims that markets are open for trade, the reality reveals many barriers for the majority of people around the world in accessing financial services and investment opportunities. Intermediary actors have long played a crucial role in the financial system, providing the means and connections to enable people to invest: a service which adds considerable cost to the process.
Seen by many as a breath of fresh air, the digital economy has opened up easier access to services that have for centuries been exclusively accessed by the ‘elite’ and well-connected. Today, with a smartphone in their hand, any user can connect directly with institutions and other actors, entirely bypassing the need for a central entity.
This direct approach is exemplified by Decentralised Finance or DeFi model, in which users have access to decentralised platforms and participate in a global open market. Users will also enjoy full custody of their assets without the involvement of a central party or intermediary in the transactions. “DeFi is the next step in the revolution in disruptive financial technology that began 11 years ago with bitcoin,” wrote Jeremy Eng-Tuck Cheah from Nottingham Trent University.
The DeFi universe is composed of products and services which resemble the conventional market and financial system — people can borrow and lend cryptocurrencies, earn interest, participate in betting platforms and invest in funds — all via blockchain-built smart contracts and with no need to go through a bank or asset manager.
The DeFi movement is still in its infancy and a transition into a fully decentralised system is likely to unfold in careful steps. Authorities are slowly recognising the move towards DeFi and are showing increasing openness to the new model.
In July SEC, the US Securities and Exchange Commission, approved ethereum-based fund Arca, for the very first time. Arca is a blend of traditional finance and innovation, using blockchain technology via a digital asset fund offering its shares as digital securities called ArCoin.
Rayne Steinberg, chief executive officer of Arca said that the SEC approval of the fund was “a ground-breaking and transformative step toward the unification of traditional finance with digital asset investing.”
“It is truly exciting to be pioneering new digital investment products through our Arca Labs division that marry best practices used in traditional finance with the many potential benefits of digital and blockchain technology — this is the next stage of development for the digital ecosystem,” the CEO added.
As with the ICO boom in 2017, when the crypto market exploded with tokens and projects that did not survive, it is crucial that investors engage in thorough research: there are still many projects around that are out to scam users or simply don’t offer real value. All things considered, it seems clear that a new trend in finance is steadily growing and disrupting the environment to create a more liberalised and autonomous financial system, so do keep an eye on DeFi and seek information.
In our recent interview with DigiByte founder and blockchain expert Jared Tate, he stress on the fact that decentralised finance is not a new concept, it was there at the inception of blockchain and in the idea behind bitcoin. Cryptocurrencies, at their very core, where designed to provide maximum autonomy to users and create a decentralised system where all individuals enjoy the same level of access to services and resources.
Watch the full interview with Jared Tate about DeFi and the next step of the crypto revolution:
DeFi is an evolving concept. Let us know your questions about the topic. Contact us via social media or at info@cassiopeia-ltd.com.
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