This is the third and final instalment of the ‘What is DeFi and Who Cares?’ series. In this article, I’ll be covering yield farming and betting. Understanding how the application of smart contracts and liquidity pools are set to disrupt the industry will be critical for companies, especially banks and bookmakers who currently operate in this space.
In simple terms, yield farming is much like purchasing a bond. You loan your cryptocurrency through a smart contract (much like a bond), for a defined period of time. The issuer of the bond agrees to pay you a specific interest rate + principle over that period of time. The cryptocurrency that the holder wishes to earn interest on are locked into liquidity pools which you can read about in my first series of the DeFi articles here.
The funds which are locked into liquidity pools are referred to as TVL or total value locked which measures the total amount of cryptocurrency locked within DeFi lending smart contracts. At its core, this process of seeking out higher rates of return isn’t much different from that of switching from one interest savings account with one bank to another.
The major differences are that the majority of DeFi yield farming takes place using the Ethereum blockchain using ERC-20 tokens. Currently, bridging platforms are being created to enable cross-collaboration across different blockchains to enable greater access to a wider variety of liquidity pools and higher yields (interest rates).
The global gambling industry is worth approximately $500bn. Looking to take a large slice of the pie away from industry laggards are new DeFi companies such as Augur. Take the sector of sports betting as an example: currently, an individual placing a bet would be given the odds for choosing a team/horse/car to win, and also be provided the option to choose a specific variation e.g. win/lose by how much.
The odds would be provided by the bookmaker who using some hilariously biased odds will take money from all bets placed. The vast majority of betters that lose will handsomely reward the bookmaker for the odds. Winners will be paid out from the losers bets, but the net impact is that the bookmaker will be making money (the difference between the amount taken and the amount paid out). The house never loses.
DeFi is looking to bring a new way for gambling to take place which facilitates more direct peer-to-peer betting with the disintermediation of the betting agency. Peer-to-peer betting is possible now via a betting agency, but the problem is the large commission that is taken by the agency in between the transaction.
The vision for DeFi betting will be to leverage smart contracts so that both parties commit an amount of cryptocurrency to a smart contract, and depending on the outcome the funds are released to the winner. While a small transaction cost is likely to be involved by the software and contract provider, it is expected to be significantly less than the bookmaker.
The next five years could be highly disruptive for betting companies unless they are focused on providing DeFi software themselves, they risk disintermediation and destruction.