A Battle for Liquidity
“Thy who controls the liquidity, controls the DeFi universe.”
- Anonymous DeFi Degen, 2022
To those familiar with legacy finance, it comes as no surprise that it is a capital-intensive business. Banks rely on deposits to transfer value via withdrawals, remittances, and credit services. Stock brokerages use stocks held by one customer to enable short-selling by another. Insurance firms collect premiums from those insured to pay out claimants.
DeFi is not dissimilar in this regard, except instead of paying a centralized financial entity to provide these services, value (read: profit margins) accrues to token holders in the form of a shared project treasury, reduced supply of tokens via burning or buybacks, inherent demand for governance tokens to redistribute value, or a combination of the above. In this way, users (often token holders as well) become their own bank, creating a flywheel effect that has propelled DeFi markets to where they are today.