Genesis of the DeFi Matrix on Algorand

The DeFi Matrix growing on the Algorand blockchain will enable frictionless liquidity and revolutionize the individual investor paradigm by offering more diversification and sovereignty of capital.

Genesis of the DeFi Matrix on Algorand
Photo by Joshua Sortino / Unsplash

On a Tim Ferris podcast dated 16 November, Balaji Srinivasan, a venture capitalist and polymath we follow closely, floated the concept of the DeFi Matrix. Understanding the concept is critical to envisioning the future of Algorand.

The DeFi matrix is the concept that all assets are exchangeable for all other assets, forming an infinite row by infinite column matrix that aligns all assets' values relative to each other. For Algorand, this means that Lofty tokens are swappable with Yieldly, or Nada citycoins are interchangeable with USDC in a frictionless balanceable way. The DeFi matrix assumes the presence of an Automated Market Maker like Tinyman that builds a real-time order book arraying the value of these assets on the Algorand blockchain. Currently, friction exists due to Know Your Customer laws and other government regulations. Over time, this could change during system scaling. The promise of this concept when applied to Algorand's low transaction fees and almost instant settlements is incredible and warrants further study. Here's the primary source:

In the Web 3.0 ecosystem, individuals and entities own assets protected through cryptography and a blockchain of distributed ledgers that tracks who owns what. Like Algorand's layer 1 protocol, the blockchain forms the basis for the complex Web 3.0 architecture. Each application built on Algorand adds a submatrix of the outstanding DeFi matrix. Over time these submatrices will become more connected and allow faster asset transfer without conversion to USD or other fiat currency.

Legend has it that Bill Gates once said, "a platform is when the economic value of everybody that uses it exceeds the value of the company that creates it." Under this definition, the most successful and largest platforms will also host the most extensive DeFi matrices. Algorand is well on its way.

Currently, the DeFi matrix on Algorand is fractured. This disaggregation is symptomatic of Algorand's youth. As apps such as Yieldly and Tinyman grow, more assets will be available for staking and swapping on their platforms. Businesses like Lofty.AI and Opulous are developing their own exchanges where S-NFTs and real estate tokens can be bought and sold. The platform that can aggregate these submatrices will add massive value to Algorand.

In such a marketplace, every asset would compete against every other asset. Capital becomes frictionless under that paradigm and capital efficiency balloons. Everything will be liquid all the time. Every asset will trade against all others. The implications are staggering. Here are three critical ones:

1. Cross-collateralization-- individuals will be able to gain real-time pricing data of their assets, enabling collateralization for DeFi loans. We see this as de-risking the marketplace because lenders will see if their borrowers are worthy of a loan in real-time. Proof of liquid assets, even real estate, a notoriously illiquid asset now liquid with tokenization, enables an instantaneous value computation. No transfer to fiat currency is necessary.

2. Extreme liquidity -- If all assets can always be priced using an automated market maker with an order book, individuals need less cash. Cash, especially with high inflation, becomes a liability. Holding assets that can be liquidated when required means less inactive capital.

3. Infinite access -- More humans will access capital markets through platforms like Algorand due to their permissionless and decentralized nature. Liquidity and assets usually reserved for the wealthy will be available to all humans all the time. Here at Polybius Square, we hope for a future where all have access to financial markets because we believe that access to capital unleashes talent. What do these principles translate to with the current Algorand ecosystem of apps?

Our example includes the following applications:

1. Tinyman

2. Yieldly

3. Lofty.AI


5. Opulous

Algorand's ecosystem is rapidly growing. We have experience with all five of these applications, so we will focus on them for now.

Imagine you have the following in your wallet and are an unaccredited investor living in Portugal:

1. 1000 Algos

2. 100 Lofty Tokens

3. 100 Republic Notes

4. 300 Republic Tokens representing SAFEs

5. 100 Opulous S-NFTs

With this portfolio, every month, you receive recurring revenue from your Republic Notes, Lofty tokens, and Opulous S-NFTs. Under the principles of cross-collateralization, you could take out a loan on these assets to fix your car or remodel your house without ever having to sell the underlying securities. While the tokens are held in a smart-contract escrow as collateral, monthly recurring revenue streams could even help pay off the loan.

Under the principles of extreme liquidity, your Republic Tokens representing SAFEs in startups could be bought and sold in real-time at an exchange. Imagine you invested in a Republic Series A offering. Before the company IPOs, you want liquidity to reallocate capital into a different investment. The tokenization of the assets means that after a successful Series D raise, the value of your tokens could be significantly higher. You could then sell your tokenized SAFEs at your convenience, where most traditional VCs would have to wait until the lockup period expired after an IPO.

Finally, imagine that you house hack and have cash flow by renting a room at your place near the beach. You want to invest your profits into cash-bearing assets but are not accredited and not located in the United States. No problem. It can be easier to invest in some deals as an unaccredited, non-U.S. citizen in the United States than an unaccredited U.S. citizen. We did not write the rules. They sure do not make sense in the digital age. You could then put your free cash flow every month into ICO's such as the recent $GARI public initial coin offering.

As these principles scale, savvy investors win. We eagerly await the opportunities for entrepreneurs and users that will emerge in this system. You can read more Algorand analysis here.

If you are bullish, stack Algo and use the dApps built on Algorand.

If you are bearish, no need to invest in Algorand. There is no lack of places to put your money these days.

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I am not a financial advisor. This article is for educational purposes only. You should do your own independent research before making any investment decisions.

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