How will this forever change the cryptocurrency industry?

 How will this forever change the cryptocurrency industry?

How will this forever change the cryptocurrency industry?


A pledge of the future. The legendary American bank issued a loan for bitcoins. How will this forever change the cryptocurrency industry?


In the world of cryptocurrency, a significant event happened: the world's second-largest exchange Coinbase in terms of transaction volume took a loan secured by bitcoins. The money was provided by one of the largest investment banks, for many personifying Wall Street, Goldman Sachs. 

Such transactions have become commonplace for the crypto industry and even gave rise to a separate direction - decentralized financing, or Defi. But classical financial institutions have so far been wary of dealing with cryptocurrency when lending, considering it too risky an asset with an ever-changing rate. 

Market participants see a breakthrough in the incident, which in the near future can contribute to the close integration of fiat money and cryptocurrency, and with them the two financial systems. 

Crypto pioneers

The terms of the deal between Coinbase and Goldman Sachs, including the interest rate, were not disclosed. It is only known that the crypto exchange provided the bank with bitcoins as collateral.

 They belong to her or are on the accounts of customers, it is not specified. According to the reporting of the site, at the end of last year on its balance sheet were 4487 bitcoins, which at the time of approval of the loan were worth about $ 170 million.

At the same time, the value of the pledge is still calculated in dollars. If the rate of the most popular cryptocurrency falls too much, the borrower will have to replenish it. 

The lender is going to monitor compliance with the terms of the contract around the clock. According to Bloomberg sources, Goldman Sachs was interested in the possibility of control, as well as the "structure of the transaction."

The choice of the bank was not accidental: in early spring, Goldman Sachs was already conducting its first operations with bitcoin options, however, then they were over-the-counter, that is, they were not related to Coinbase.

 However, such a step was a signal of the readiness of traditional financial institutions to recognize cryptocurrency as not only a means of speculative earnings but also a full-fledged investment and payment instrument.

Peeped

Meanwhile, in the crypto industry, there is a whole industry aimed at finding and providing financing – Defi (Decentralized Financing). 

The usual operations in it are based on the blockchain, and loans in most cases are smart contracts - special computer algorithms that allow you to fix and track the ownership of an asset. 

After signing by the parties, each contract is stored in the blockchain and in the future, due to a large number of participants in the process, each of whom is responsible for part of the common cause, is executed automatically.

For a long time, the main scope of application of smart contracts remained the ICO (Initial Coin Offering) procedure - a cryptographic IPO, with the help of which companies place their shares on exchanges.

 The main difference is that the return on investments of investors, along with profitability, occurs through the repurchase by issuing companies of their tokens acting instead of shares. Such a process replaces the payment of dividends and is financed from the profit of the enterprise. 

The obligation to redeem tokens from holders after a certain period of time is prescribed in smart contracts concluded with them.

Decentralized financing has given a new impetus to the development of smart contracts. In 2019, it was called "a new dynamic that revived the cryptocurrency industry", and experts were sure that soon Defi would be able to fully replace traditional banks, using open-source protocols instead of the usual technologies. 

Most of the existing Defi applications run on Ethereum blockchain technologies associated with the cryptocurrency of the same name, which ranks second in the world after Bitcoin in terms of total capitalization - $ 257.4 billion.

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One of the first and most famous examples of Defi is the decentralized lending service MakerDAO developed by Dane Rune Christensen. 

With its help, any Ethereum holder can pay a certain amount of cryptocurrency, draw up a smart contract and issue his own cryptocurrency-backed stablecoin DAI, the rate of which is tied to the dollar in a one-to-one ratio. 

Thus, the clients of the site take a loan from it with money issued specifically for them (and in fact by themselves).

One-to-one

This principle of operation allows the Defi-service to make do with the minimum amount of equity necessary for the basic expenses of any company. The borrower can repay the loan at any time by receiving back the collateral.

 To do this, you will have to pay a special stabilization fee designed to maintain a stable rate of the stablecoin: if necessary, DAI tokens circulating on the market buy it. In addition, the fee is paid upon repayment of the loan and the accompanying reverse exchange of DAI to Ethereum.

 The very presence of such a fee stimulates borrowers not to sell tokens once again, increasing their supply on them. If the sale does happen, the DAI service returned to the storage is "burned", so that the overall offer and rate remain at the same level. 

The services of MakerDAO are used by both individuals and legal entities that need cheaper money than banking money.

The size of the collateral may exceed the amount of the loan, and its current value is constantly monitored by the rest of the participants in the blockchain system. If the deposit becomes cheaper, part of it is written off in favor of the service with an additional fine. 

The general scheme looks like this: the borrower has a certain amount of Ethereum - known and reliable, but still volatile (changeable) due to the nature of the cryptocurrency. 

Defi-service allows him to relatively easily and quickly get a loan in stablecoins, which are still a cryptocurrency, but already more stable due to the binding to the rate of the usual fiat money.

Such a loan is limited in use: DAI tokens can either be paid within the crypto industry (as well as in rather rare examples of partnerships with representatives of the classical financial system) or exchanged for fiat currencies on crypto exchanges. 

Other examples of popular Defi services: InstaDApp, BlockFi, and Compound. The latter is closest to the usual banks and offers not only loans but also deposits in cryptocurrency. Borrowed funds are taken from the attracted money of depositors.

Some experts refer to Defi crypto exchanges and related exchange protocols, as well as all kinds of analytical and forecasting platforms or companies and services offering services for managing crypto assets.

 Representatives of the decentralized financing sector are united by the same thing as the entire crypto industry as a whole - the ability to make transactions and receive services bypassing government bodies and official structures, primarily central and commercial banks.

 Every credit institution in the world of Defi creates its own currency, which is recognized and accepted by other market participants. Other distinctive features are high speed of transactions, low rates, and commissions.

1.9billion dollars is the daily turnover of the crypto exchange Coinbase

The obvious risks of Defi include the same volatility inherent in all cryptocurrencies without exception. Their rate can change by tens of percentage points in a short period of time, and Ethereum is no exception. 

This is fraught with a sharp depreciation of the collateral, because of which it will be partially written off and appropriated by the credit platform. In addition, in moments of significant subsidence in the value of Ethereum, the commission in MakerDAO and other similar services increases.

 Such a measure is necessary to maintain the binding of the token rate to the dollar or other classical currencies: the less Ethereum is in circulation, the higher the demand for it, and hence the rate.


Despite the obvious drawbacks, Defi has enjoyed wide popularity over the past three years. Now, for the first time, a traditional investment bank decided to join the booming sector - one of the largest and oldest in the world, founded in 1869 by Goldman Sachs. 

Among the representatives of Wall Street, he is also known under the nickname The Firm ("Firm"). He chose the crypto exchange Coinbase as his partner. In May 2022, it ranks third in the world in terms of daily transaction volume ($ 1.9 billion), slightly behind the second (the FTX exchange with transactions of $ 2.2 billion per day).

Gained credibility

Founded 10 years ago in San Francisco, Coinbase has a reputation as a cutting-edge company and stands out even in an inherently innovative cryptocurrency environment.

 The site does not have a headquarters, and all employees, of which there are about 3.7 thousand at the moment, from the very beginning, long before the coronavirus pandemic, worked remotely. 

Already in the second year of its existence, Coinbase had more than a million customers. Right now, the number of unique visitors — through the site and app — is 2.1 million.

In 2017, the exchange became the first "crypto-horn" in history: the company's market valuation reached a billion dollars, and four years later exceeded 100 billion. In professional circles, Coinbase has an unofficial status as the "blue chip of the cryptocurrency world". 

In the traditional economy, "blue chips" are called the largest, most famous, stable, and reliable firms. A year ago, Coinbase entered one of the largest American exchanges NASDAQ.

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