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In a recent article on cryptocurrencyI was talking about its suddenly fashionable and equally disconcerting cousin, decentralized finance.

Challengeas the cool kids call it, became a hot enough topic to grace the cover of the September issue of Fortune. One thing you’ll be hard pressed to find, however, is a succinct definition of DeFi.

I’ll try to provide a basic overview (I don’t believe there is an authoritative definition), some examples, pros and cons, and areas credit unions should watch for threats as well as opportunities. .

“Decentralized” is the key word here. Like cryptocurrency, which harnesses the computational power of a potentially unlimited number of endpoints to maintain its distributed ledger, DeFi’s goal is to disrupt the traditional model of reliance on a central hub. of operations.

In financial services, of course, that hub is the bank or the credit union.

In this regard, cryptocurrencies like Bitcoin are a subset of DeFi, an application of this new model made possible by blockchain technology.

What other financial services could become the next forays? Consider deposit taking and lending, two of the core activities on which credit unions are based.


PoolTogether is an app offering what it describes as a “price-linked savings account.”

Clients deposit funds and rather than earning a few cents in interest each cycle, they have the chance to pocket hundreds or thousands of dollars awarded to a small minority of clients each week.

The site refers to its model as “lossless prize games on the Ethereum blockchain”.

Is it risk free? Of course not – there is no deposit insurance to provide a safety net. And since the deposits are denominated in cryptocurrency ether, the account holder bears the currency risk.

A rising tide lifts all boats in a bull market – the value of ether has more than quadrupled this year – but things aren’t so rosy when the pendulum swings the other way.

Ether is down more than 20% from its May high and has fallen more than half twice, not the type of stability a traditional investor is looking for.

It may sound crazy, but PoolTogether has attracted over $150 million in deposits with a limited promotion.

“Watch for signs of member transactions involving DeFi players.”

Glen Sarvady

Compound financing

On the loan side, Compound financing attracted capital from leading investors like Bain Capital and Andreessen Horowitz.

Its platform enables peer-to-peer lending in a wide range of cryptocurrencies, essentially operating as a marketplace connecting buyers (borrowers) and sellers (lenders/depositors), eliminating the middleman from the financial institution out of the equation.

Compound Finance has the equivalent of over $8 billion in loans outstanding on behalf of its depositors, who have over $18 billion in their accounts.

PoolTogether and Compound Finance, as well as almost all DeFi companies, conduct their transactions in cryptocurrency. Nothing, however, precludes applying the same approach to dollars transferred between participants via an automated clearinghouse – essentially what PayPal has been doing for 20 years.

CUNA Member Experience and Operations Council 2021 and CUNA Technology Council Virtual Conference

It wouldn’t be such a sexy deal, especially for crypto-centric early adopters who presumably make up the bulk of current volume. But it would provide a degree of stability (albeit not assured) that would appeal to a wider market.

Although DeFi seems several years away from taking a significant bite out of traditional banking, such models are often smart innovation far from an inflection point.

Credit unions would therefore be wise to watch for signs of member transactions involving DeFi players and be prepared to educate them on the risks involved (e.g. lack of NCUA Insurance).

Given how much DeFi startups often resemble financial institutions, credit unions should think about how to ensure a level playing field.

Finally, consider how credit unions could deploy a similar model in support of their “people helping people” mission.

GLEN SARVADY is CEO and 154 Advisors.

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