‘Banks should be afraid’ of cryptocurrency-based DeFi

Billionaire investor Mark Cuban is very optimistic about the future of DeFi, or decentralized finance, and DAOs, or decentralized autonomous organizations.

“There are a lot of financial institutions that should be concerned,” Cuban wrote in a blog post on Sunday. On the one hand, “banks should be afraid,” he wrote.

DeFi apps aim to recreate traditional financial systems with cryptocurrency, while DAOs can govern and oversee DeFi apps and other projects.

DAOs are similar to traditional corporations or organizations, but instead, control within DAOs is democratized. Rather than having a centralized leader, DAOs have members who vote on decisions and rules, which are then encoded into smart contracts on the blockchain.

For example, through DeFi Loan, users can lend cryptocurrency like a traditional bank does with fiat money and earn interest as a lender. DeFi loan applications, like Aave, Compound, and Maker, are governed by DAOs.

The structure of these decentralized protocols is one of the things that piques Cuba’s interest and makes it think that DeFi could be a serious competitor to traditional banks.

He uses Aave as an example to explain why. (Cuban, “Shark Tank” star and owner of the NBA Dallas Mavericks, invested in Aave, which he disclosed during a Reddit “Ask Me Anything” in February.)

“Aave, like its competitor Compound, looks like a bank. But it isn’t. Nowhere near,” Cuban said. “Aave is a fully automated, license-free platform where there are no bankers, no buildings, no toasters, no safes, no cash, no custody. money, no forms to fill out, no credit scores involved. “

“Everything is controlled by smart contracts. It’s fully automated. You don’t need to get approval from anyone and it takes a few minutes to take out a loan.”

This, of course, is part of what makes DeFi so risky. Unlike a traditional bank, there is no regulation or insurance on your money when using DeFi. Although DeFi loans are secured by other crypto assets, borrowers using DeFi protocols cannot be held liable otherwise if they are unable to repay a loan effectively.

“The old crypto saying” don’t put in more than you can afford to lose “will double for DeFi”, CoinDesk reported. “This stuff is ultra-complex and a lot can go wrong.”

Indeed, between January and April, $ 156 million was stolen DeFi-related hacks, according to CipherTrace.

Another feature that draws Cubans to DeFi exchanges is the fact that they don’t necessarily need to raise a lot of capital to scale, he says. “Rather than the business owners, investors and their creditors putting in capital for all transactions to take place, liquidity providers (LPs) do it for them,” he wrote.

Liquidity providers are users who fund pools that facilitate borrowing or DeFi lending, among other things.

For Cuba, this makes automated financial markets like DeFi “much more capital and operational efficiency than similar traditional companies”.

Cuban recognizes the risks and that there are technicalities to work out with all this technology, but always says that “this approach is the future of personal banking.”

And despite the risks, DeFi has been particularly popular lately. Over $ 60 billion is currently locked into DeFi protocols, according to DeFi Pulse.

Cuban is a liquidity provider for a decentralized exchange, he wrote in his blog post. It is also invested in a number of companies in the crypto space, including DeFi companies, and has a portfolio of multiple cryptocurrencies, including bitcoin and ethereum.

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