A tamper-proof and openly traded digital cash, Bitcoin, changed the finance fundamentals. Now, DeFi projects aim to do the same on TradFi.
The world’s first cryptocurrency, Bitcoin, was introduced by an anonymous person or group known as Satoshi Nakamoto in 2009. It represented a groundbreaking innovation in electronic cash systems. Bitcoin enabled secure payments and transfers directly from one party to another, bypassing the need for a central authority. Thus, it provided services to those unbanked individuals who had no or limited access to banking systems, integrating them into the financial ecosystem. However, there is a catch.
The crypto industry, which originated with Bitcoin and expanded into a vast ecosystem with numerous alternative projects, has simplified entry and exit for individuals in the financial world. Without facing any sanctions, freely buying and selling assets caused high price volatility in the market. This lack of price stability led to an unpredictable market, but it’s not insurmountable. Decentralized finance (DeFi) projects address this Achille heel of the crypto industry with revolutionary solutions.
Shaping the crypto market’s future
An interbank-grade DeFi initiative, Secured Finance aims to bring about a historic financial transformation akin to what Nakamoto did through Bitcoin. It creates a market where a new financial instrument, bonds, can be freely traded instead of regular currencies like BTC (or USD). This market aims to reduce risks related to interest rates and enhance price stability. Therefore, investors can more accurately calculate the future value of their funds, determine risks, and make smarter investment decisions. Eventually, mitigating the uncertainty of the crypto market will pave the way for long-term investment perspectives.
Secured Finance uses a yield curve model to provide a stable investment environment. The yield curve shows interest rate movements over various periods, making it more straightforward for investors to forecast future market trends. The yield curve model also plays a crucial role in pricing derivative products, enabling more complex transactions and increasing market depth. Investors can leverage real-time market data and predictable yield curves for more informed investment decisions. Providing stable returns in the highly volatile crypto market would attract new investors.
New investment opportunities
The interest rate market is critical in today’s uncertain economic environment to accelerate the maturity and development of the crypto industry, according to Masa Kikuchi, the founder and CEO of the Swiss developer Secured Finance AG. Kikuchi’s team has built the Secured Finance protocol, which will be operated by a decentralized autonomous organization (DAO).
Interest rate markets improve the balance of risk and return, offering investors more stable investment opportunities. “This will be key in accelerating the maturity and development of the crypto ecosystem,” the CEO noted, adding: “In the long term, it is likely to establish a more stable market status and create new investment opportunities.”
Existing DeFi projects mainly focus on variable interest rates using asset pools. In this model, participants gain yields as much as they lock their tokens to pools. Therefore, achieving a fixed interest rate in pool-based systems is challenging, as it heavily depends on the funds users have locked in. Secured Finance successfully enhances liquidity in the secondary market through a unique market structure and provides fair price formation. This way, a more predictable and stable environment comes to life.
Bitcoin’s underlying technology, blockchain, has philosophical significance in shifting from centralization towards a decentralized, trustless system. Secured Finance aligns with this philosophy, aiming to introduce new possibilities to the crypto world, akin to the innovations Bitcoin introduced.