The reason justifying the existence of NEPRIV. N.B: You do not have to read this section to understand NEPRIV, do so only if you feel the need to understand the vision behind NEPRIV.
Today yields from lending and trading activities change rapidly. Sophisticated DeFi yield earners are familiar with constantly having to rebalance their portfolio of assets across many competing platforms. This is time-consuming and expensive as gas fees once again eat into yields. Often the advertised APYs ignore important factors like impermanent loss, and it is time-consuming to calculate real ROIs as APYs are unstable and constantly fluctuating. There isn’t an easy unit of account. Despite the explosion of growth and billions of dollars of capital being locked up in smart contracts across DeFi platforms, it is still way too difficult for many cryptocurrency users to participate.
Anecdotally, investors, I talk to most often mention the risk of volatility and default failure when discussing why they don’t want to put funds in DeFi or cryptocurrencies in general.
Existing decentralized earning platforms expose liquidity providers to complex code-driven outcomes. Network participants must evaluate an array of catastrophic scenarios where the resulting state could wipe out their holdings or lead to significant impermanent loss. It is hard to anticipate the net effect of extreme market volatility or focused economic attacks. nYUSD narrows the set of possible outcomes by giving liquidity providers dynamic exposure.
Decentralized financial instruments are showcasing the power that a trustless financial industry can wield. Powerhouse projects in the DeFi space like MakerDAO, Synthetix, AAVE, Compound, Curve, and others are producing yields for users that have none of the constraints and rent-seeking of tradFi instruments by replacing bookkeepers, escrow, and various overhead with algorithms, trustless oracles, and decentralized ledgers. Different market-driven yields can be found on numerous decentralized platforms, but there is nothing out there that services & pulls together all of the different decentralized protocols & allows for a normalized risk curve and derivatives for risk mitigation.
With 60% of Global debt yielding less than 1% & over $15 trillion of global debt yielding negative rates, capital continues moving into higher risk yield streams. This is not a coincidence or a trend. Historically speaking, going all the way back to biblical times, working capital chases yield, assuming relatively equal risk.
The acceleration of debt levels, across the globe, was happening before the financial crisis caused by Covid-19. In Q1 2020, we saw global debt increase to $258 trillion. This number is 331% above global GDP, according to the IIF, which represents global banks and financial institutions. With the Federal Reserve operating under the pretense that they have an infinite supply of cash and the euphemism “money printer go brrrr” joining the mainstream lexicon, it’s quite clear these numbers will likely increase and debt issuance to GDP will continue to accelerate.
The traditional financial system, referred to as TradFi in this paper, is experiencing a historic uptick in aggregate debt levels while yield and interest rates plummet. Meanwhile, there is a decentralized financial system, referred to as DeFi in this paper, burgeoning in the digital economy with digital assets and cryptocurrencies. While debt levels, which is referred to as TVL, or total value locked in decentralized financial protocols, has increased from hundreds of millions last year, to billions of dollars in 2020, yield on these instruments continues to dwarf the menial rates offered by comparable products in the legacy TradFi system. Conversely, due to assumed higher risk levels coupled with higher efficiencies provided by smart contract technologies, annual percentage yield (APY) is far higher on decentralized protocols than what can be found in the traditional financial system. Working capital is following the historical trend of following higher yield which is why we are seeing TVL moving to DeFi at an accelerating rate. This is a trend that will continue.
The need for familiar TradFi instruments to exist throughout the DeFi ecosystem has never been stronger.
The yield products in the decentralized markets which are yielding higher APY than yield products in traditional markets are currently crypto-backed loans. Instead of selling crypto for fiat, borrowers are staking digital assets and receiving digital assets in return. While these loans have mostly been short-term loans to traders, the system has proven to be efficient & ripe for expansion. These efficiencies will inevitably attract higher value, longer duration loans to decentralized ledgers. The efficiencies referenced are enabled by smart contracts' ability to hold digital collateral until both sides of the transaction fulfill their obligations algorithmically. The reduction of custody, settlement, and escrow - labor-intensive, costly actions within the legacy system - to algorithmic actions is reducing the rent charged by the labor to perform these actions. These efficiencies, coupled with the perception of higher risk, are why the yields are higher on decentralized systems. As the risk in DeFi converges on risk levels perceived in TradFi, by the nature of the loans moving from crypto-backed loans to traders to collateralized mortgage loans to homeowners, for instance, the efficiency of smart contracts will continue to offer higher yield on decentralized systems than traditional centralized systems.
What’s more, the efficiency of smart contracts and DAO technologies allows for far more complex derivative instruments to be built & provides a level of transparency and security unfathomable to current financial networks.
All of these efficiencies are currently stemmed and built off of crypto-backed loans.
These efficiencies should extrapolate to mortgage debt and corporate debt moving to decentralized platforms on a longer timeline. This should also encourage more complex derivatives based on debt and yield to move to decentralized platforms. We will be able to structure far more complex derivatives and track them with far greater efficiency and transparency than possible before the innovations of blockchain, cryptocurrency, smart contracts, and decentralized autonomous organization technology were realized. $244 trillion in debt and yield-based derivatives will continue to move to more efficient technologies over time. The migration of yield and yield-based derivatives from less efficient centralized financial systems to more efficient decentralized financial systems will be one of the largest movements of wealth in human history. NEPRI FINANCE exists to help facilitate this transition and make the decentralized financial system more efficient, risk-flexible, and attractive to a wider range of participants.
There is a massive market for people wanting to get into crypto who (1) don’t want to bite off the entire risk curve of owning, lending, or receiving an entire digital asset & (2) will never take the time to use a decentralized autonomous organization (DAO) to create a smart contract which algorithmically scripts both sides of the loan or agreement. Over 99.9% of global debt is still structured via traditional markets and is starving for yield. Conversely, more advanced financial companies have no risk tolerances. This allows for different structures at each point of the yield curve with the riskiest (likely hedge funds) wanting to put the least money down with the highest return for their bet/hedge. On the contrary, more conservative investors are often willing to give up a large portion of upside opportunity in order to access safer instruments. “Riskless” products, as tradFi describes them, are not currently offered in the decentralized financial ecosystem. The opportunity to structure these types of instruments will allow for more risk-averse investors in the traditional markets to move into the decentralized markets.
In the shorter-term phase (DeFi) & medium-term phase (Proof of Stake) risk ramps will continue to create markets and industries for traditional investment firms who want to “get off zero” or “get above 1%.” As this happens, more and more types of loans will move to decentralized ledgers. In the long run, and partially through this process, lenders and borrowers will understand why decentralized and trustless intermediaries are superior and less costly than the current 3rd party intermediaries. As this happens, larger portions of the $244 trillion in global debt will move to the chain, creating the opportunity for more yield, more risk ramps, and higher CD-like (collateralized debt) products for fiat and crypto depositors of the new age commercial banks & financial markets.
Furthermore, efficiencies across lending protocols are non-existent in the current DeFi markets. The ability to pull yield from numerous protocols and tranche them into higher and lower yield buckets is something that exists in traditional financial markets but is more efficient in decentralized financial markets, assuming an acceptable level of liquidity.
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