Understanding Finance, Decentralized Assets, and the Future of DeFi
Ethan is joined by Evan Kuo from Ampleforth, for a exploration into the potential of DeFi – Decentralized Finance.
Today’s decentralized assets, such as Bitcoin and ETH, can be seen as the primitive building blocks for tomorrow’s DeFi use-cases. These include lending, debt, and synthetic equities, however, we quickly come to a realization of their inherent limitations. Evan breaks down how their limitations are due to their high correlation to each other and why they bring about the need for extreme overcollateralization and the risk of autoliquidation.
This brings up a big problem in crypto that not many are addressing. The diversification of these primitive building blocks will be required for DeFi to reach its potential. Hypercorrelation is a huge problem, one that threatens the very viability of cryptocurrency.
Further topics covered in this episode:
- The AMPL is a decentralized commodity-money like Bitcoin, but with near perfect supply-elasticity like fiat.
- Its protocol automatically increases or decreases the quantity of tokens each user holds in response to 24 hr volume weighted price by adjusting a global scalar variable (similar to a gravitational constant or coefficient of expansion).
- Because traders of this coin realize gains and losses in quantity as well as price, the protocol introduces a fundamentally new set of incentives–requiring profit-maximizing users to trade in a different manner.
- Ultimately, unique behavior in response to these incentives creates a new different movement pattern, resulting in lower correlation with bitcoin and floating price assets today.