Motivation
Last updated
Last updated
Fiat money is not backed by actual commodities any longer, and there is no limit to the amount of supply. The abolition of the gold standard in 1971 handed the control over the valuation of fiat money to federal power. During the past 50 years, when the economy has been in recession or undergoing financial market problems, the government has actively intervened in the market by issuing more money and adjusting interest rates. As a result, inflationary pressure has grown out of control due to rapidly increased money supply and debt. Market participants predicted that the bubble would outburst one day, but there was no alternative. However, the paradigm of currency has shifted with the advent of Bitcoin. An open network allows everyone to store and transfer values without intermediaries such as countries or banks. The supply is fixed at 21 million, safe and transparent, and can be traded anytime anywhere without any physical restrictions. It is even faster and cheaper than the existing financial network. As Bitcoin gradually gains people's trust and support, Ethereum has been released to handle more complex transactions. Ethereum's Smart Contract allows transactions to be automatically executed on the blockchain, based on the codes with no concern of forgery. It grants anyone to issue digital assets, trade cost-effectively, and proceed with any type of financial transaction: loans, deposits, futures, options, leverage, and insurances. For these reasons, Ethereum has become a fundamental infrastructure for decentralized finance beyond the role of currency.
The DeFi market, based on open network infrastructure and open-source culture, is dramatically evolving. As it is free to combine multiple protocols, a number of them are formed. With users participating worldwide, Total Value Locked up in the DeFi market has grown from $1B as of February 2020 to approximately $123B as of April 2021. This number is incomparable to the pace at which the traditional financial markets have grown for hundreds of years under strict regulations. Unlike the traditional finance system, most DeFi protocols distribute all fees and profits to the community without intermediaries. Users can earn higher profits than they do in traditional markets, and also one of the main advantages is that anyone can invest without physical or any regulations. For example, anyone can issue DAI through MakerDAO and deposit it in Compound or Aave to earn interest income reliably. Alternatively, he or she can provide liquidity to decentralized exchanges such as Uniswap, Curve, Balancer to gain trading fees or generate higher revenue from derivative exchanges like DYDX and Synthetix.
With the explosive growth of TVL in the DeFi market and numerous ways to create profits, it has become possible to design long-term and stable decentralized annuity products. An annuity is a financial product that a subscriber regularly deposits a certain amount of money and receives in periodic cash flows, mainly to prepare an individual retirement or build a steady income source. Annuity subscribers select a method of accumulation (temporarily or in installments) through a bank or insurance company to subscribe and deposit their money during the accumulation phase. The trustee will keep the payment under regulatory compliance. Then, the annuity operator will issue investment instructions to the trustee to generate profits and invest in various investment products such as deposits, funds, stocks, bonds, real estate, and infrastructure according to the instructions. At the payout phase, annuitants receive payment according to the stipulated terms of the contract. Unfortunately, going through many institutions, annuitants sacrifice various fees involuntarily, ranging from sales commission to management fee, trustee fee, and success fee, which cause severe damage to long-term profitability. Furthermore, the traditional annuity system (also pension) contains various structural vulnerabilities such as the risk of inflation (sometimes hyperinflation), low-interest rates due to low growth, fiscal imbalances, intergenerational unfairness, and opaque management even though it is a fundamental safeguard for financial stability and essential investment tool for generating stable cash flows. Of course, a citizen who lives in a liberal democratic country with a high income, steady GDP, population growth, and a clean political environment may not have to worry about these problems. Still, very few of the 7.8 billion people on the planet can be free from it or hedge to it.
Decentralized annuity protocol and its decentralized autonomous organization (DAO) can be an elegant solution to overcome all of the problems mentioned above or hedge the risk. It can eliminate all fees except for the gas cost, significantly improve profitability through various DeFi product and investment strategies, and hedge against inflation and system risk of traditional finance while operating transparently. Problems such as opaque operation, fiscal imbalance, and unfairness can never occur since smart contracts are automatically operated by the rules.
