Consumer Products+ Decentralized Finance?

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By Marcin
 · 
January 17, 2022
 · 
4 min read

If the functions of a financial institution, bank, lending company, credit card, or stock market become open source, public goods, then they become like public parks or public transportation.

When they become totally composable, then anyone can bake them into new products.

In this example, the public facing product product is a loan, and the financial tool is Yield Farming.

So what happens when you put these 2 together?

A person deposits some collateral into a special account, then takes out a loan against that collateral. The special account which holds the collateral is actually a high yielding interest account that uses Yield Farming to produce anywhere from 5%-90% interest APY. This interest is used to pay back the original loan.

Everything from the account, to the Yield Farming, to the protocols from which the farming discovers the interest rates, are all separate protocols which are "stacked" on top of each other to produce this new type of software.

Here's an example of a very popular Yield Farming protocol: https://aave.com/

These stacks are completely novel, totally blue sky. They can be used in tons of untapped scenarios.

For instance, I buy a cup of coffee at a local café. Some % of the revenue is distributed into an account that's tied to my phone number, cc number, or wallet id.

This money can be further used to numerous different ends. The examples below are very rudimentary, but intended to demonstrate the versatility of decentralized finance:

  1. You use that small % to to simply earn interest, which in some cases can be up to 20% on coins tied to the US Dollar
  2. It can be entered into a coordination market at market price and allow early supporters to profit should the company grow. More betting more, less stock market.
  3. It can be entered into a coordination market where tokens are sold at prices determined by a bonding curve, allowing organizations to incentivize particular buyer and seller behaviors. This allows them to raise capital from customers in a non-linear way, while also incenting customers to buy more frequently.
  4. Customers can be rewarded with synthetic assets (these are tokens whose value is tied to a particular global stock, commodity, rare metal, etc)
  5. The money can be entered into an Idea Market. Curious about what this is? Check it out: https://ideamarket.io/

To put it simply, the entire technology space becomes an open and verifiable platform on which to discover ways to rewards buyers, sellers, and collaborators

Bonding Curves

Looking at the 2nd and 3rd bullet above, you may notice a new term, "coordination market" and "bonding curve." I'm not going to dive into this in depth right now, but in short, particular incentives can be designed directly into how prices are determined

Here's a quick example of a bonded curve using real world items. Imagine a small company produces and sells uniform copper tubes for $5. After every 20 tubes sold, they increase the price of a single tube by some amount, let's say $1.

1-20 tubes = $5
21 - 40 = $6
41 - 60 = $7

So when 61 tubes are sold, the price becomes $7. This company will also buy back these tubes at the same rate, so they'll buy back tube #61 at 7, and tube #37 at $6.

This is one way a bonded curve can work. It might not seem like much, but it's useful, and powers all kinds of decentralized financial applications.

Now imagine you can change the rate at which prices increase... In fact you can have numerous formulas that determine the price at which these are sold and bought back.

Depending on the exact formula used, you can reward early discovery, or long term holders, or frequent small purchases, infrequent large purchases, and so on.

Using algorithms to formalize incentive systems

Imagine if buying your favorite artist's work, or supporting a relatively unknown product could automatically deposit a % of your payment into one of these special accounts...

This account could be a prediction market affording you a chance to earn money for helping the artist or company in their early days. It could be as simple as a share of stock. It could be a mechanism for raising funds for a product combined with a bonding curve...

Outro

Of course there are so many perverse incentives and manipulations that can emerge here, but that's another post.

Nonetheless, it's powerful stuff and worth paying attention to.

Below are a couple of examples of Self Repaying Loan products in crypto-land.

Note: I'm not intending to support these particular projects and I'm not invested in either, but at this time, they're pretty decent examples of some novel uses of DeFi in this space.

Theopetra Labs

Self repaying mortgages

https://medium.com/@theopetra/theopetras-self-repaying-mortgages-3108d4e8fea9

Alchemix

Self repaying loans

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