Crypto corner: Defying DeFi

Decentralised Finance, more commonly known as DeFi, is what many are claiming to be the ultimate use case for blockchain and a significant driver behind the current crypto bull run.

So, what is DeFi?

DeFi takes the same premise behind cryptocurrencies, a promise to make money and payments universally accessible, into the realm of financial services.  It is doing this by providing a global, open alternative to everyday financial services – savings, loans, trading and insurance – as well as inventing new products along the way.

Although the definition of what makes a product or protocol DeFi is still evolving, the following is widely accepted.

At their core, DeFi products and protocols aren’t managed by an institution but rather smart contracts (currently almost exclusively on the ethereum blockchain). Once these contracts are deployed to the blockchain, they can be run by themselves with little to no human intervention.

The governance of DeFi products and protocols is also designed to be, or to become, increasingly decentralised, whereby governance tokens are used by a community to put forward resolutions and vote upon them.

Trust is built by ensuring all code and user activity (albeit pseudonymously) is openly displayed on the blockchain for anyone to audit and see.

DeFi product, also known as Dapps (Decentralised Apps), are designed to be permission-less whereby users can interact directly with smart contracts from their crypto wallets from wherever in the world they are. It will be interesting to see how this plays out as regulators inevitably get increasingly involved.

Finally, DeFi is interoperable (something known as DeFi Lego) whereby multiple protocols can be built or composed on top of each other, creating entirely new products and services.  Many see this as the very early stages of forming the backbone to a new global financial technology infrastructure.

Where is DeFi today?

The total value locked (TVL) in DeFi protocols has risen from under $1bn in Feb 2020 to over $40bn today (and probably higher by the time you read this).

Hundreds of players have entered the space and innovation is moving at a pace.  A few key players include.

• MakerDao – a stable coin and decentralised reserve bank
• Compound – a collateralised borrowing and lending protocol
• UniSwap – a non-custodial decentralised exchange (DEX)
• Augur – a decentralised prediction market (the Betfair of blockchain)

So, what does this have to do with gaming and gambling?

Last summer, a new craze emerged known as yield farming whereby intricate strategies were devised to maximise yield generation on crypto holdings.  This meant locking up cryptocurrencies in return for reward tokens, which in turn got deposited into other liquidity pools to earn further rewards and so on. This led to incredible and unsustainable yields (in some cases greater than 100% APY or annual percentage yield) and spawned a whole series of yield farming Dapps each with its own game strategies and loyal communities. Although becoming less so, this is a high-risk activity not dissimilar to gambling with the potential to win a lot but also a risk you will lose.

The gamification of DeFi

Many Dapps have taken gamification principles into the heart of their products and user experiences, which resonates well with their mostly Millennial audiences.

Aave, a leading DeFi lending and borrowing protocol, has launched Aavegotchi’s inspired by the retro classic Tamagotchi’s. However, this time around, the cute little avatars are NFTs (non-fungible tokens) and represent DeFi collateral that is earning an ongoing passive yield.

Owners can battle their avatars, level them up and equip them with wearables to change traits but they can also sell and buy their avatars or liquidate them to release their collateral.  It’s early days but the potential seems limitless.

We also see the likes of Pancake Swap that is gamifying the DEX (decentralised exchange) space. Their token Cake forms the lifeblood of their ecosystem so that users can not only be rewarded for providing liquidity to the exchange but also yield farm, stake, enter lotteries and build NFT collections with them and. as a result, has been one of the fastest-growing DeFi Dapps of the past few months.

DeFi’ing gaming and gambling

Finally, and probably most pertinent for the gaming and gambling industry, is the potential for DeFi to form part of the gaming experience itself. A phenomenon known as ‘play to earn gaming’.

Dapps like PoolTogether offer users a no-loss lottery whereby participants lock their crypto into a smart contract. At the end of each week, one lucky participant wins the pool’s entire interest earned during that period but at no risk to any participants’ capital. Gamification abounds with different crypto lotteries with different prize pools, community decision making on things like payout structures, loot boxes, leaderboards and an open protocol to allow others to create entirely new no loss games and user interfaces. Given that interest rates can be as high as 10%, the prizes are not to be sniffed at either.

There are plenty of other options for earning interest while playing, from the ability to stake NFTs earned or created in games, to staking other players or even casino bankrolls. Couple this with decentralised governance models and you have an audience that is not only engaged in playing your games but are financially rewarded for doing so and also have a say in terms of how the game(s) are run.

Having sat on the sidelines the time is right for mainstream gaming and gambling industries to be taking their first tentative steps into this new blockchain world before they get left behind. Who’s to say we won’t be seeing the first no-loss casinos, trading-based gambling games and NFTs that contain interest earning and tradable bonuses being issued by some of the big gambling brands by the end of the year.