Micro-business: DeFi

Maybe you’ve already got your community going or maybe you’re looking for a way to help bootstrap monthly costs as you get started and make use of excess production in power.

Pick and Shovel

Imagine you found yourself in the gold rush days and had gold mining on your mind. Now you could buy a pick and shovel and go start digging, and maybe that would work out for you, but more likely it would not. Imagine alternatively selling picks and shovels to those who are out digging; this is a much safer play which is far more likely to succeed. But how does this apply to DeFi?

Decentralized finance is bleeding edge technology which is already changing the way the financial services world works. Blockchain technologies like Bitcoin and Ethereum need a lot of compute power to run their networks.

This power comes in the form of miner nodes. Miner nodes are users who do the back-stage work for the network in order to verify and confirm all the transactions that are happening. Every time someone wants to buy or sell something with cryptocurrency, the network of miner nodes have to double check to make sure the buyer is good for the purchase, then transfer the amount to the seller, and verify and confirm this process has taken place across the network.

Anyone who wants to buy some hardware and set it up can become a miner. Setting up your own mining hardware is rewarded with direct payments on a daily basis.

Mining quickly became a valuable source of income for people who specialize in doing this work for the networks.

Over time, so many people started doing it that the value miners get for doing their work dropped to just about even with the cost of electricity. This means for most people, it’s not profitable to mine cryptocurrency. But you’re not most people. You’re producing your own power! This means you stand to recoup the difference between the commodity rate of electricity and your own cost of production. Radically sustainable communities like yours have a huge advantage when it comes to mining cryptocurrency like bitcoin and ethereum.

The best machines for mining bitcoin is the Antminer S9. These went from $3,500/ea to just $100/ea when the profitability dropped to the commodity rate for power. The price of these machines fluctuates wildly on the open market along with the expectation for what bitcoin is going to be doing. This means you can get them super cheap on ebay or craigslist now. If you have a source of cheap or free electricity handy and any excess production, then you can convert that extra power to cash. Personally, my solar system is sized to fill my batteries by noon each day which means that for the rest of the day my solar power is just going to waste. I intend to implement something like this asap, and expand as shown below in the coming months and years.

Here is a quick calculator tool I put together showing how to bootstrap a business like this to be profitable within the first year and then grow exponentially each year…

Arbitrage and Hedging

There are lots of markets for buying and selling cryptocurrency. Cryptocurrency has a lot of volatility; prices are always shooting up and down.

Arbitrage is a market function which traders fulfill in order to normalize the price of commodities across exchanges and markets.

For simplicity’s sake, imagine Coinbase is buying and selling Bitcoins  at a price of $45k. Now imagine another exchange like Robinhood is buying and selling them at $46k. The prices are never quite exactly the same, so how do they set their prices? The prices are normalized across exchanges when traders conduct arbitrage. This means we buy from one exchange and sell to another. This also means we get to keep the difference! This is how markets normalize prices across exchanges. Arbitrage happens with all commodities and securities that are bought and sold on any market.

There are lots of kinds of crypto markets. For example, there are distributed odds markets for betting on literally anything using smart contracts. Because these markets are distributed, they also facilitate a form of arbitrage.

Risk is defined as the cost of an outcome multiplied by the probability that it will happen. Hedging is when you place bets in both directions so that no matter what happens, you will win. This is just arbitrage for risk. Risk is more art than science, but hedging and conducting risk arbitrage are more science than art.

I have previously worked on cryptocurrency arbitrage, but the volatility at the time was quite low compared to today’s chaotic world. The opportunities are exploding as more and more DeFi markets come online.

Social DeFi Analysis and AI

One of the really exciting things about the emerging distributed finance markets and in particular the betting markets is the fact that every transaction is public and so is the list of who is taking bets and which way they’re betting. This means it would actually be pretty easy to build a dataset on which users are making the right bets over time. This could lead to really interesting analyses on who to follow and who to bet against.

In particular, generative adversarial networks could be applied to the task of examining the historical success rate of everyone on a particular bet and then making a smart decision about which outcome is better based not just on the current bets but also on the entire betting history of everyone currently making a bet.

Community Business Models

What’s really exciting about this business is not just that it would be easy to bootstrap and get started for cheap, but it would provide for the electric needs of your community along the way. This means it would be valuable not just as its own micro-business, but also as a kind of public utility for the community.

I envision a version of this project where a person or small group is put in charge of producing power for the community, and they are entitled to use any excess production not needed by the community for mining cryptocurrency. Then the profits from the micro-business are distributed among those who work on it as well as to a general fund for community development.