August 10, 2022

Refi is the brand new DeFi. If there was ever a time for the crypto skeptics to ask regulators to tighten their screws, it’s now, says Ashley Taylor Buck, the co-founder of ReSource. ReFi may very well be the reply.

The crypto trade is battling turmoil. Market costs are dropping. There are meltdowns of crypto lending companies that have been as soon as held up because the embodiment of the trade’s finest. All of this quantities to a collapse in public belief on this motion’s future. 

To be able to discover a method ahead, we should first deal with the foundation explanation for this ailment. That is against slapping on a Band-Help over the signs. There must be a powerful basis for actual improvements to return. We’d like sincere conversations in regards to the systemic points inside DeFi which have led us to the place we’re. 

By now, it needs to be clear that what began with the Terra Lab disaster is not only a nasty blip. Amidst a flurry of lawsuits and investigations, the legitimacy and longevity of crypto has been referred to as into query. 

It begs the query, ‘Had been our fundamentals robust to start with? Or is that this the exodus we wanted to rethink the dominant trade method?’ 

The crypto credit score disaster contagion 

There was a lot evaluation and debate over the Terra Luna and Three Arrows Capital collapse. To what extent did the implosion set off the contagion unfold throughout the broader market? 

The fallout and repercussions of this has been felt throughout the trade and by unusual traders, prompting comparisons to the 2008 international monetary disaster. We have now at all times identified that there are robust hyperlinks between crypto and the broader monetary market. However the fall of a few of the ‘most secure’ tasks in crypto inform us one thing. It’s essential to revisit the basics of a few of these protocols and the trade’s relationship with credit score as a complete. 

The Terra debacle referred to as into query the soundness and speculative nature of stablecoins. These will not be primarily based on underlying “actual” property however on an arbitrage mechanism of which the worth of the Terra USD (UST) relied on. 

By this mechanism, merchants are incentivised, via excessive yield choices, to swap UST for Luna tokens and vice versa, to take care of its peg to $1. A coordinated assault that set off a collection of unstaking and promoting of UST prompted extreme worth volatility. The arbitrage mechanism couldn’t rebalance it, leading to a “loss of life spiral” for each Luna and UST. Many crypto tasks and funds relied on UST as a stablecoin. The UST collapse created a domino impact in losses all through the complete crypto ecosystem.

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The autumn of Terra Luna is harking back to shockwaves felt throughout the worldwide financial system after the collapse of the 2008 U.S subprime mortgage market. Besides there was no central entity stepping in to avoid wasting the day. The edifice of “too large to fail” didn’t apply within the crypto world.

After the Terra fallout, there was a flurry of heavy promoting and renewed requires self-regulation. The muse of a full blown crypto lending disaster was laid naked. 

One after the other, high crypto lending companies started to maneuver their funds within the face of liquidity stress and overleveraged positions. There was an insolvency disaster shortly brewing. There was withdrawal freezes by centralized crypto lending platforms like Celsius.

It grew to become clear that unsustainable yields and under-collateralized loans was precisely that – unsustainable. It created the proper danger profile for prime volatility and platform failures in instances of market volatility.

What is clear from this crypto lending disaster is the necessity for extra transparency and accountability within the area. It was an echo of the 2008 monetary disaster. Lenders acquired by with high-risk property that have been under-collateralized and overvalued. This grew from poor danger administration and determination making. And, retail traders paid the value.

It is a systemic failure that requires an pressing refocus on higher transparency and accountability within the area. And a relook on the lending mannequin on which these companies have been primarily based is required.

Different market situations

This crypto bear market coincided with a set of macroeconomic components that mixed to set off the seemingly good storm. Bitcoin prices slumped by a nearly 70% drop in value from its all-time high in November 2021. The US inflation rate rose by 9.1%, a four-decade high. This was not limited to the US, with Central Banks all over the world scrambling to tighten monetary policy. This was in an effort to dampen inflation.

It’s clear that crypto markets are closely and increasingly intertwined with traditional stock markets and macroeconomic shocks. The world has also been dealt with ongoing uncertainty over the Covid-19 pandemic. The recovery phase, geopolitical uncertainty from the Ukraine crisis, and regulatory actions by the state all have an impact on crypto’s volatility. 

ReFi: A possible solution

One of the key innovations in crypto is decentralized finance (DeFi). It is a system of finance poised as an alternative to traditional finance designed with the goal to “bank the unbanked.”

The idea is that anyone anywhere with an internet connection can access and benefit from this alternative system. With the onset of widespread adoption of crypto, the DeFi space has also accelerated, both in supply and demand. 

Blockchain technology has reimagined the way centralized financial institutions operate. By removing intermediaries, DeFi is designed to disrupt the way money is managed and accessed globally. In the struggle to achieve ‘mass adoption’, however, we must recognize that barriers to entry to DeFi and crypto still exist. 

This crypto winter should serve as a reminder of this. We must guard against future storms. We must witness greater adoption. And we must remain focused on building protocols that are digestible, and accessible in a broad definition. And, we must have a real-world use case, meaning designed for people outside of the industry. 

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ReFi: The future of finance is here

Regenerative finance (ReFi) is a decentralized movement to create economic systems that create more balanced relationships between each other and our natural ecosystems. The ReFi movement aims to create a new and improved financial system. That is, people and the planet are the priority for the economy. Not conglomerate, profit-seeking organizations. 

At the core of the ReFi movement is the goal to positively impact the lives of people, communities, small businesses, and others. It was created to put money into the hands of those working toward a better future. It does this by funding projects focused on respecting the environment. And it empowers communities who have been disenfranchised from the global financial system. 

In a nutshell, ReFi aims to provide financial support to projects that are making a lasting, positive impact on the world. 

ReFi can help people who historically have not been able to access, or who have been excluded from, traditional financial institutions. It does this using the concept of a mutual credit system.

Blockchain-based mutual credit is the idea where people can borrow from each other. This bypasses traditional financial institutions that are increasingly serving the few and not the many.

ReFi aims to make credit accessible to more people by developing new, regenerative economic models. 

The regenerative economy and a mutual credit system

The regenerative economy can be defined as a circular economic system. The aim is to enhance life and wellbeing without depleting capital resources. 

Mutual credit is a multilateral exchange network in which endogenously created currency serves as a medium of exchange. It is reliant on our resources and our contributions to society as a basis for rethinking their financial value. Each network consists of members who mutually agree on what the credit system can be backed by. 

Members can create their internal monetary system that is backed by commodities such as products, services, and more. It is not dependent on pre-existing monetary/ capital investment. 

Members can access near interest-free loans granted in the internal currency of the mutual credit system. This loan can be used to purchase what is needed from other members of the network. A member will settle their debt by selling their products or service to other members in the network. 

Why blockchain mutual credit systems offset risk

When it comes to cryptocurrency, those who invest are at risk of volatility. This can be fluctuations in the stock markets, political factors, and inflation rates. This puts even the ‘safest’ investments, like stablecoins, at risk too. Volatility is another external variable that removes independence and autonomy from holders. Again, a person’s financial well-being is dependent on external factors that are usually outside of their direct control. 

Mutual credit on the blockchain is built to provide decentralized credit approval with smart contracts that offset accumulated risk. Unlike traditional mutual credit systems, there are no central authorities and no risk of the system turning into a dynamic reminiscent of a traditional bank. 

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Instead, mutual credit on the blockchain provides stability mechanisms while resolving problematic and irresponsible risk management we are witnessing today. Mutual credit systems are accessible and community focused. Naturally, these are flexible and anti-cyclical. This means they are resistant to external financial factors that otherwise would lead to a downturn in the market. 

ReFi can better equip and protect the 99%

Using goods, skills, services, and human potential, people can move away from traditional finance or crypto liquidity. ReFi has the potential to revolutionize the financial security of individuals and business owners. At scale, borrowing from each other should be more affordable and designed to support growth of the many, rather than just the few. It should lead to better and more accessible rates over time, as we remove the inefficiencies and extractive tendencies from today’s centralized models. 

ReFi can redesign what currency means. By using credit that is backed by goods, skills, services, and human potential, people can move away from being dependent on volatile digital and inflationary assets. 

Preventing another crypto credit crisis 

Despite macroeconomic factors that have impacted the crypto and traditional finance sectors, there is hope. The bear market has forced investors to be more conscious of their financial decisions.

ReFi and blockchain-based mutual credit systems are starting to shape the way businesses are run. And, how credit lines are accessed and what credit means as a whole. It addresses the exclusionary culture of traditional financial systems by allowing more people access to credit. 

It also shows that people do not need to depend on traditional finance for loans. Therefore ReFi removes the risk of falling into unmanageable debt. A blockchain-based mutual credit system aims to shift the narrative of profit over people and planet in the crypto space. And it helps to foster a movement around how we build a more equitable, regenerative society. 

About the author

Ashley Taylor Buck is a blockchain entrepreneur who joined the early Ethereum neighborhood in 2014 with a imaginative and prescient to additional social mobility with this new financial paradigm. She co-founded ReSource to empower native communities and small companies to develop cooperatively by providing credit score to one another. Beforehand she was the primary worker of ConsenSys, a Group Microgrid Specialist for LO3 Power/Brooklyn Microgrid, pioneered the Cyberthreats and UN Sanctions program for Compliance and Capability Abilities Worldwide, and based a neighborhood and occasions area ReGenCy in Brooklyn.

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