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.
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.
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.
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
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.
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.
This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.
Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.
By clicking on "I agree", I declare that:
1 - This website may only be accessed directly or indirectly by the following persons in Singapore:
1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.
2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).
3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.
4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.
2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms. If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore. The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction. It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights. You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos. You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video. Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website. You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason. The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice. The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accessing to the Website, you agree to the foregoing.
The funds referred to in the Website are for information only. It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors. The contents of the website is not reviewed by the MAS. Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions. You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.
Any decisions made based on the information contained in the Website are the sole responsibility of yours. Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives. The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.
Investment involves risks and may lose value. 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. The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future. The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons. The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes. Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.
Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence. An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.