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DeFi: Crypto’s ‘Wild West’ of Finance | WSJ - YouTube
Channel: unknown
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- [Narrator] A rapidly
growing financial trend
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is attempting to turn
traditional banking on its head.
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It's called decentralized
finance, or DEFI.
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And it promises to bring digital banking
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for cryptocurrencies to the masses,
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but with no middlemen and
almost no barriers to entry.
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- So in the last 18 months,
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this idea has really mushroomed
within the crypto market.
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- [Narrator] Estimates vary,
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but a conservative one says
the total value locked in DEFI
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reached $114 billion
in November this year.
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And while that's just a fraction
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compared with traditional
banking, DEFI is growing quickly.
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It has increased more than
1,200% since June, 2020.
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Here's why some are calling
DEFI the Wild West of finance,
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where investors are
entering uncharted territory
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to take on big risks for the
chance of even bigger rewards.
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When we talk about DEFI, we're not talking
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about a specific financial
product or service.
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- DEFI is just the next iteration
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of this grand experiment
in cryptocurrencies,
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which is basically just to recreate
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the financial system in
a digital online format.
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- [Narrator] Paul Vigna has been reporting
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on the equities market
for almost 25 years,
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and has been covering
cryptocurrencies since 2013.
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- Anything you could do
at a bank or a brokerage
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is handled rather than
through an individual
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and a corporation, it's handled
through a computer program.
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- [Narrator] You can think
of the emergence of DEFI
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like this, a dusty town
in the wild American West,
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where there's no sheriff,
no bank, and no cash.
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Here at the local Trading Post,
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people can trade and lend goods,
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and do pretty much anything
else normally done at a bank.
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It isn't owned by a
single person or entity.
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And unlike traditional finance,
trades that happen here
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are verified out in the
open where everyone can see.
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For example, one type of transaction
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that takes place at the
Trading Post is lending.
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To ensure the trade,
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the borrower gives
collateral for the loan.
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The lender then earns
interest off this deal
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in the same way a bank would.
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Transactions like this are all
recorded on a public ledger
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that everyone can see.
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In the world of DEFI, this
ledger is called a blockchain,
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which is a network of computers
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built to store and record transactions.
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- Every computer on that network
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has an identical copy of that ledger,
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so that all of the data is
open, all of it is public.
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- [Narrator] This is different
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from a traditional stock
trade, which works like this.
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- I have a broker, the
other party has a broker,
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the company has an institution
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that keeps track of the stock itself.
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All these different middlemen,
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all these different intermediaries
have their own ledgers,
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have their own internal databases
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where they're recording the transactions.
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A blockchain takes care of all of that
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and does it in an open way
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that anybody can track the
progress of that trade.
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- [Narrator] Most DEFI services
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run on Ethereum's technology,
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which also hosts the cryptocurrency Ether.
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It's one of the most commonly
traded cryptos in DEFI,
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along with stablecoins, digital assets,
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which are pegged to
currencies, like the dollar.
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The DEFI services run on the blockchain,
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similar to how apps run on your phone.
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And the mechanism that allows them to work
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is called a smart contract.
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- Smart contract as an idea
have been around for years.
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It's another app that is
focused on a bank-like service.
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So all it's really doing
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is taking all the parameters of a trade
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and sticking them into
fields and automating it
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and then monitoring it.
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- [Narrator] Smart contracts
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are designed to give DEFI transactions
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more transparency and security.
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- And because all the
parameters were being inputted
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into a program, ostensibly
it's more secure
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because there shouldn't be any
real debate or contradiction
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about the terms of the service.
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- [Narrator] Despite
this layer of security,
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decentralized finance
carries a lot of risk.
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In many cases,
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the people facilitating DEFI
transactions are anonymous.
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This has caused fraud to become rampant.
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A poorly created smart
contract could have loopholes
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that allow scammers to steal
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or other design flaws that
affect the value of assets.
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Another risk is security.
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And because most DEFI
services aren't insured,
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if a platform fails or is hacked,
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millions of dollars can be on the line.
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- The problem is that you may not know
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who wrote the program.
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You may not know how secure
the program itself is.
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That's a significant, significant risk
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that you really can't overlook.
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These DEFI protocols
virtually once a week,
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there is a problem with one of them.
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- [Narrator] So far this year,
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investors have lost about one
and a half billion dollars
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to DEFI attacks, hacks, and cons.
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And in this Wild West of finance,
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regulation is still
virtually non-existent,
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though, that could change.
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Here's the chairman
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of the Securities and Exchange Commission
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speaking with The Wall
Street Journal about DEFI.
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- But if this field is gonna have
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an ability to move forward,
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it's gonna be inside some
public policy framework
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and inside some sort of
regulatory perimeter.
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Look, folks have already
been hurt in this field.
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- [Narrator] While
decentralized finance is risky,
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many think the potential
benefits are worth it.
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- The benefits are an
ability to make money.
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You are either lending
out your cryptocurrencies
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and you're getting
interest paid back on that,
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and that interest can be
anywhere from 5% to 20%,
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even more.
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You can be a passive investor
and earn money on an asset
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that you were probably storing in a wallet
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that was doing nothing.
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The other benefit is you can
borrow against your holdings.
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A lot of these services are being used
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as a way for people to get a
bigger pool of cryptocurrency
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to go through a bets out
into the derivatives market.
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So it's a way for you to turbocharge
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your cryptocurrency
gambling habit, essentially.
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- [Narrator] If DEFI continues growing,
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it's likely that
regulations will be imposed
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to smooth out its rough edges
and reduce risk for investors,
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which makes sense.
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Even in the wildest of Wild West towns,
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a sheriff eventually showed
up to lay down the law.
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