Crypto-based DeFi takes on Wall Street

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This summer I took my first step toward becoming a “degen.” The word—short for “degenerate gambler”—comes from the zany, $1.5 trillion cryptocurrency world, where cheeky speculators have embraced it as a term of endearment. My toe dip into the club? A pool party held by a digital-only organization that would be happy, someday, to replace your bank.

The event was a “loss-less lottery” run by an app called PoolTogether. Leighton Cusack, who cocreated the project two years ago, prefers a different name for the game: a prize-linked savings account. While traditional savings accounts spread meager interest among all depositors, PoolTogether regularly delivers a big payday to a handful of winners.

At the end of July, the app had almost $200 million in total deposits and was sharing nearly $100,000 in prizes per week. While that makes PoolTogether sound a bit like a casino, most of its activities involve acting like a bank. The app takes deposits, lends money, and pays interest. (Even the lottery is banklike: Many banks and credit unions use prize-linked accounts.)

But it isn’t a bank. There are no steel-and-concrete vaults, no tellers, and no executives in charge. Indeed, there is no company in control. The incredible thing about PoolTogether is that the system runs entirely on software. Cusack and a band of online collaborators whipped up the application using open-source code and cryptocurrency parts, built a pretty website, and launched it all into the ether. The program runs on Ethereum, a global network of computers that collectively tabulate a ledger, or blockchain, through which it dispenses interest, and jackpots, every week.

PoolTogether is a prime example of “decentralized finance,” or DeFi, a booming part of the neck-breakingly volatile crypto economy. PoolTogether and similar projects are drawing a generation of tech-savvy tinkerers, crypto-coin early adopters, outside-the-box thinkers, and, yes, occasional degens to an alternative and largely independent financial system, one where they can borrow, lend, save, and insure themselves—based on rules they make themselves.

While not the biggest DeFi project, PoolTogether’s structure is typical of this burgeoning world. People who deposit assets earn loyalty points in the form of tokens—called “pool” in this case—that let them vote on PoolTogether’s direction. Savers accrue more tokens over time, even if they never win a lottery drawing. People can sell these tokens for a profit on crypto exchanges, an additional incentive to participate. (At the time of my dabbling, a pool token traded for about $10, down from a high of $32 in March.) It’s an all-crypto universe: In virtually all DeFi projects, deposits and earnings alike are denominated in crypto, never in fiat currency. Also, caveat DeFi-or: Assets aren’t covered by the federal insurance regime that protects “normie” accounts.

As a largely unregulated part of the economy, DeFi has exploded in tandem with demand for cryptocurrencies like Bitcoin and Ethereum. Most of the action takes place on Ethereum, the second-biggest crypto network, whose blockchain comes with a built-in programming language, Solidity, that makes it easy to build so-called decentralized apps. For now, the ecosystem is populated primarily by people who range from comfortable with to rabidly passionate about crypto—with all its risk and legal uncertainty.

But that insularity may not last. DeFi represents a concerted, crowdsourced effort to put digital coins to work, offering people financial reasons to hold crypto beyond merely speculating on price movements. Crypto “is finally not just about a new gold or a new kind of money,” says Olaf Carlson-Wee, one of the crypto market’s earliest major investors. He ranks DeFi as being of “earth-shattering level of importance” and adds: “This isn’t just about the assets”—like Bitcoin and Ethereum—“it’s about all of the financial instruments.”

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