How exactly has DeFi changed the financial world?

The death of Madoff has brought the Ponzi scheme, which was closed 11 years ago, back into the public eye. It was a major financial case that touched the financial world and shocked Wall Street. Over a period of 40 years, it defrauded 136 countries and as many as 37,000 people, with the amount involved exceeding 60 billion US dollars. It caused huge losses to many ordinary investors, large financial institutions, banks, and wealthy families, and brought tragedy to many families, even the family of the manipulator himself.

After so many years, what lessons can we learn from this scam? Does the financial industry today have new technologies and changes to solve the scam risks of that year? Let's talk about it today.

Looking back at the Ponzi scheme, the pyramid-style passing the buck

Madoff was a successful young man. He started his own investment securities company from scratch while in college. He seized the dividends of the US stock market boom in the 1960s and launched a computer securities trading system in the 1970s. Since then, the company has become famous and has become the largest independent securities trader in the United States. Later, Madoff himself served as the chairman of the Nasdaq Stock Exchange. His market leadership and innovative spirit of daring to challenge traditional models made him a well-known financial advisor. At the same time, he was also a philanthropist who funded charities and public utilities all over the United States.

Behind such a successful person who has both fame and fortune, he is actually walking on the path of financial fraud. He can be said to be "invincible" and has deceived many financial tycoons on Wall Street.

The first victims were Madoff's friends, relatives and people he met in clubs, and then the scope quickly expanded to large charities, universities, global institutional investors and wealthy families. Among his clients, there are many celebrities, such as legendary baseball pitcher Koface, New York Mets owner Wilpon, New York developer Sverrestein who rebuilt the World Trade Center, and many large financial institutions and banks including HSBC, UBS, JP Morgan Chase, Bank of America, BNP Paribas and Citigroup.

If you want to become Madoff's client, it is far from enough to have money, you also need connections. In the eyes of many people, investing money in Madoff has become a symbol of status. These high-level clients have also brought celebrity effect to Madoff's company, making the company's reputation grow.

Annualized 10%, stable income

In the view of many investment veterans, when investing in Madoff's company, what you should worry about is not losing money, but losing a day's opportunity to make money if you invest one day later.

Regardless of whether the market is good or bad, Madoff's clients can basically get an annualized return of 10%. When someone asked about the logic behind the investment, he would be perfunctory and evade the question with answers such as "no detailed explanation" and "inside information". If someone repeatedly asked about the principles of investment, they would be kicked out by Madoff. Many wealthy people know that the capital market inevitably has some means that are inconvenient to show to others, so they think this behavior is reasonable and trust Madoff more.

Not open and transparent

In fact, this investment product, which claims to have a stable annualized return of 10%, is actually a Ponzi scheme at its core. It relies on the funds invested by later entrants to provide returns for predecessors. It is a pyramid-like model of passing the parcel. As long as there is no large-scale withdrawal of principal and a constant influx of new funds, it will not explode. Due to its non-public and non-transparent investment model, it has deceived investors, regulatory agencies, and the media and has remained undetected for 40 years.

But how can a lie never be exposed?

In September 2008, the global financial crisis broke out and hedge funds and other institutional investors were forced to withdraw hundreds of millions of dollars from Madoff's accounts. As of December, more than $12 billion had been withdrawn and there was almost no new cash inflow, so the scam was difficult to continue.

Under his son's questioning, Madoff finally confessed that he had no reasonable profit model, and that it was all a fraud, a pyramid scam, in which the first comers made money and the later comers made money, and that he had defrauded 50 billion US dollars so far. Madoff's sons reported him to the police, exposing this shocking fraud to the world.

There were tens of thousands of victims in the Madoff fraud case. Some investment managers lost their careers because they invested their clients' money in Madoff. The SEC was also humiliated. As early as 1992, there were many clues about Madoff's fraud, but none of them yielded any results. Many people went from being rich to bankrupt overnight. Some lost their homes, some committed suicide out of despair due to losses, and some died of a heart attack during a long lawsuit. Even Madoff's family fell apart. He was sentenced to 150 years in prison. His eldest son committed suicide two years later. His younger brother was sentenced and fined. His youngest son died of cancer. It is a pity.

DeFi financial reform, transparent governance and risk avoidance

As we mentioned above, one of the main reasons why Madoff’s scam lasted for 40 years without breaking was that his investment model was not open and transparent.

This kind of shady operation can be perfectly solved if placed in the world of DeFi.

DeFi refers to decentralized finance, which has been very popular in the blockchain industry in the past two years. The current total locked-in volume is US$76 billion, which has exceeded the total assets of many old banking giants such as Deutsche Bank.

Openness and transparency

Traditional finance is managed by a centralized team and is prone to human-related risks, such as the global financial crisis in 2008. In contrast, DeFi does not need to rely on intermediaries/third parties. It creates trust by eliminating third parties and relying on the decentralized nature of blockchain.

At the same time, DeFi's top-level technical design avoids the risk of opacity. The on-chain data is open and transparent, whether the project is open source and audited can be verified, and funds can be charged and withdrawn at any time. If the development team of a certain protocol decides to close/terminate the project, other companies/individuals can use the open source code.

In addition, DeFi has also introduced the concept of public governance such as decentralized DAO governance. Through DAO governance, users of the protocol have voting rights on major decision-making, such as adding protocol features, deploying new versions, etc., further improving the degree of decentralization of DeFi projects.

By eliminating third parties, achieving decentralization, transparent data on-chain, and DAO governance in the underlying technology, the security, privacy, and transparency of blockchain are fully demonstrated on DeFi. Currently, DeFi is still in its infancy. In the future, we can expect more financial and other application scenarios. The current DeFi is just a seed, which may grow into a towering tree in the future!

Liquidity mining, overwhelming returns

When reviewing the history of Madoff's Ponzi scheme, one piece of data really caught my attention: an annualized return of 10%.

Although this was not outrageously high at the time, it was very difficult to maintain stability year after year without being affected by market conditions. Therefore, such a stable rate of return attracted many people to invest money crazily.

But if this rate of return is put in front of today’s deep DeFi players, I’m afraid they will say: This is my daily income (dog head).

In the past two years, the DeFi craze has swept the crypto industry. The form of "liquidity mining" has injected vitality into the funds on the chain. Many first mines have an annualized rate of return of hundreds or thousands (or even higher), and many mines have a stable annualized rate of return of 30-40%. If Madoff's 10% annualized rate were to be achieved now, I'm afraid it would be difficult to deceive people in the crypto industry!

So we see that DeFi can, to a certain extent, effectively solve the problems of over-centralization and over-opaqueness in centralized finance, as well as the problems of backroom dealings and lack of supervision. The innovative financial gameplay on DeFi also brings more high-yield financial products to investors, giving birth to a large group of "DeFi scientists" and creating many stories of getting rich quickly.

postscript

However, even in a secure, private, and transparent system like DeFi, there are still many problems. For example, if the assets are completely managed by oneself and the mnemonics/private keys are not backed up, the funds will be irrecoverable; for example, the contracts are attacked by hackers; for example, many decentralized applications are not truly decentralized; for example, some developers leave backdoors and abscond with donations; for example, the public chain is congested, and there are some corresponding security issues.

In the case of Madoff, the huge financial fraud could not escape the law in the end. He swept money in an improper way, but ended up in life imprisonment and deserted by his friends and relatives, bringing a tragic fate to countless people. It makes people sigh that technological change also requires people to be upright. A gentleman loves money and gets it in a proper way!

Finally, I would like to say a few words about finance/investment. We should not give up on innovative things in the financial field just because of the failed experiences of our predecessors. We should embrace innovation. Sometimes innovation does involve some risks, but at the same time, it also contains some opportunities and wealth codes. It is recommended that you use some idle money that will not affect your life to invest, and do not touch the foundation.