As the world becomes increasingly digital, so too has the way we manage our finances. Decentralized finance, or DeFi, has emerged as a new…
Even in a terrible situation, DeFi shows its power, and how Growi.LP can improve it more
DeFi refers to a new financial system that operates on a decentralized blockchain network. Unlike traditional finance, which is centralized and controlled by banks and other financial institutions, DeFi is open to anyone with an internet connection. It allows people to access financial services such as lending, borrowing, and investing without relying on intermediaries.
The depeg
Stablecoins are a type of cryptocurrency that is designed to maintain a stable value in relation to a specific asset or group of assets, such as the US dollar, euro, or gold. Unlike traditional cryptocurrencies, such as Bitcoin or Ethereum, which are known for their volatility, stablecoins aim to provide the benefits of cryptocurrencies such as fast and inexpensive transactions while minimizing the risk of price fluctuations. Stablecoins have become increasingly popular in recent years, with many investors and businesses using them to transfer funds or store value without worrying about the volatility of traditional cryptocurrencies.
USDC is a stablecoin that is pegged to the US dollar at a 1:1 ratio. It was launched in 2018 by Circle, in partnership with Coinbase, and has since become one of the most widely used stablecoins in the market.
In mid-March, the USDC depegged from the dollar and its value fell to $0.9 as investors panicked when they learned that Circle had $3.3 billion to back the USDC deposited with Silicon Valley Bank.
The bank’s plunge began when it announced that it had liquidated $28 billion worth of bonds from its investment portfolio at a loss of $1.8 billion. To wipe out that loss and cover the financial hole, it carried out a capital increase of $2.3 billion, which failed. Due to the negative news, the shares of the Silicon Valley bank fell 60%, and the rating agencies downgraded the bank’s rating. Eventually, depositors began to withdraw money in droves making the financial hole even bigger until the bank went into receivership.
In the end, the U.S. government said it would bail out depositors, and therefore Circle could adequately support USDC. This had a big impact on investor confidence in the DeFi ecosystem, as USDC was probably the most trusted stablecoin. However, this event has shown some advantages of DeFi.
How DeFi provides security even in bad times
One of DeFi’s biggest benefits is that it offers greater security and transparency than traditional finance. This is because the blockchain network that underpins DeFi is decentralized and distributed across a network of computers, rather than being controlled by a central authority.
In terms of security, DeFi has several advantages over traditional finance. In traditional finance (TradFi), banks and other financial institutions hold customers’ money and assets in custody. This means that if the bank were to fail, customers could lose their money. In addition, in TradFi, when a currency is being devaluated it is common for exchanges to freeze and even the government can impose restrictions on the currency.
In contrast, DeFi operates on a decentralized network, via interaction among smart contracts, there is no way to restrict the transactions.
But if the exchanges are not restricted, who is the actor shich takes the burden on the lose of value of a token? The liquidity provider (LP).
In the Automated Market Making (AMM) exchanges, is the LP the one that bears the loss of value of the token. In a pool made of 2 tokens for being exchanged, e.g., ETH/USDT, the LP gets with the tokens that has lower value, as holders of UST (Luna-Terra stablecoin) knows.
In the case of the pools with UST, many LPs ended with 100% tokens of UST, with 0 value, and 0% of the token with value exchanged (e.g.: 100% UST, 0% ETH).
And here is where Growi.LP enters to help the LPs.
How does Growi.LP fix this
Although investors can exchange stablecoins at any time, it is very difficult to avoid stablecoin depegs as you must act very fast. We thought about this when we created Growi.LP and added a feature to the product to automatically switch funds from one stablecoin to another if the first one depegs. In this case, the funds invested in USDC would be invested in DAI or in USDT. As the USDC depeg also impacted DAI, in this particular case, all funds would be moved to USDT.
As a result, investors don´t have to worry about depeg risk and their funds would be safe from depegs.
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