The coming wave of disruption: from bitcoin to decentralized finance

The coming wave of disruption: from bitcoin to decentralized finance

20-04-2021 | Insight
Bitcoin’s price fluctuations and rising carbon footprint have grabbed headlines for months. Below the surface, however, other powerful trends are starting to appear, based on bitcoin’s underlying technology. These may ripple through the world of finance for many years.
  • Patrick  Lemmens
    Portfolio Manager
  • Koos  Burema
    Portfolio Manager
  • Michiel  van Voorst
    van Voorst
    Fund Manager Equities

Speed read

  • Despite CO2 footprint concerns, cryptocurrencies are turning mainstream
  • But blockchain-based decentralized finance is the real game changer
  • All financial services may potentially be disrupted by decentralized finance

While bitcoin is increasingly considered as a store of value and a payment method, many players are recognizing Ethereum as the cryptocurrency to building a new financial infrastructure. Ethereum is the world’s second-largest cryptocurrency after bitcoin. It originally expanded on bitcoin’s blockchain, by adding a programmable functionality.

Put simply, the blockchain technology is a record of transactions that does not require an external authority to validate the authenticity and integrity of data, or in the words of blockchain experts Don and Alex Tapscott, it is “an incorruptible digital ledger of economic transactions that can be programmed to record not only financial transactions but virtually everything of value”.

DeFi players are trying to recreate existing traditional financial services in a decentralized way using blockchain

This blockchain technology is now used to create an ecosystem of mostly decentralized protocols, that aim to provide many types of financial services in a decentralized, non-governed way. This trend is typically referred to as ‘decentralized finance’, or DeFi for short. Broadly speaking, DeFi players are trying to recreate existing traditional financial services in a decentralized way using blockchain.

Figure 1: USD 40 billion in value is currently locked in DeFi

Source: DeFi Pulse, Robeco. Data as of March 2021. Locked value in USD billion.

Decentralized lending and borrowing

Lending and borrowing are key services provided by the financial industry. These activities typically require an intermediary – a bank for instance – and some level of trust. DeFi aims to disrupt this area by using smart contracts and a decentralized system of processing and validation. In short: lending without a bank.

To provide a concrete illustration, Compound is currently the largest DeFi lending protocol. Through Compound, lenders create a liquidity pool where interest rates are determined depending on supply and demand. Both lenders and borrowers can exit the loan at any time.

Currently, the core use case for decentralized lending and borrowing seems to be (margin) lending to speculate in cryptocurrencies. Yield farming may be another motivation for lending and borrowing of cryptocurrencies, as one gains the governance token (COMP in the case of Compound) and that could exceed the spread between lending and borrowing rates.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates

Decentralized exchanges

Exchanges like the NYSE and Nasdaq are examples of centralized stock exchanges. Similarly, most cryptocurrency exchanges, such as Coinbase and Binance, are centralized. These exchanges are part of a chain of third-party entities that normally ensure and oversee the transfer of assets – such as equity, bonds or foreign exchange instruments – from one party to the other. 

Meanwhile, transactions made through ‘decentralized exchanges’ (DEXes) are administered via a blockchain/distributed ledger. This essentially removes third parties, which saves time and costs. Besides, DEXes are marketplaces with no central point of control, making it much less vulnerable to hackers.

Uniswap, SushiSwap and Curve Finance are the most prominent DEXes currently operating. All three have just over USD 4 billion of value locked. Curve Finance, for example, is considered as the ‘FX for DeFi’ play, as it provides one of the best avenues to swap stablecoins.1 Curve Finance is an exchange liquidity pool with an execution price determined algorithmically. It uses an automated market maker (AMM) protocol, designed for swapping stablecoins with low fees and slippage.

NFTs are much more than digital art

On a smart contract platform like Ethereum, it is possible to tokenize anything imaginable. This includes media content like pictures, music and virtual gaming items. The result is called a non-fungible token (NFT). These digital assets are tradeable and provable representations of their underlying asset. 

As such, NFTs are one-of-a-kind digital collectibles, and could have huge repercussions for IP protection and royalty collection in the art and media segment. NFTs recently hit media headlines when digital artist Beeple sold the NFT of his work ‘Everydays: The First 5000 Days,’ for USD 69 million at Christie’s.2

But NFTs could also be used as collateral for loans or accounts receivables. Another extremely interesting potential use of NFTs is for digital identity purposes. In an increasingly digitalized world, such digital identification services seem bound to become critical. Since NFTs are as unique as one’s identity, they can literally represent any good, service or person.

What’s the impact for financial institutions?

Digital innovation has disrupted major industries, from retail commerce and media to hospitality. Although fintech newcomers have started to eat into the market shares of incumbent financial services providers, the underlying business models have so far not really been challenged. Big banks still dominate the competitive landscape.

This is partly due to the fact that their moats are protected by regulation. They have access to deposit insurance systems, and they are generally are trusted brands to safeguard money. Today’s financial system is still heavily reliant on banks and other financial institutions that play the crucial role of central intermediary that ensures the network operates relatively efficiently and in a trusted way. 

As DeFi emerges, traditional financial institutions will have to change their mindset

This pull towards the largest, most trusted entities, strengthens big bank moats and helps explain why many fintech firms end up partnering with incumbents instead of trying to displace them. But as DeFi emerges, traditional financial institutions will have to change their mindset. Some, like Square, with its CashApp that allows the trading of cryptocurrencies, have already started making this shift.

For instance, DeFi may help lower counterparty risk by providing guarantees around the execution of transactions, using opensource software in a public environment. Blockchain offers the promise of a more transparent and secure system, that does not rely on complex regulation-driven relationships. It could also open new markets, allowing increased choices in terms of products, cost and risk.

A ‘picks and shovels’ approach

While we remain in the very early stages of DeFi, it is crucial to track developments. The seeds of the potential disruption of major businesses around savings, payments, lending, investing, capital raising and insurance are being planted. As part of our FinTech equity strategy, we have a small and growing position in companies that enable the trading, managing and storage of digital assets.

1Stablecoins are virtual currencies pegged to assets such as fiat currencies, cryptocurrencies, or commodities such as gold and silver.
2See for example: Germano, S., 11 March 2021, “Beeple collage smashes digital art record with $69.3m sale”, Financial Times article.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.



1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click the “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree