American billionaire entrepreneur and investor Mark Cuban suggested that decentralized finance (DeFi) is considerably more capital efficient than traditional companies and that financial institutions should be concerned by its growth.
What Happened: In a Sunday post on his blog, Cuban explained that since DeFi projects are decentralized — instead of relying on a cloud computing provider — the cost of the computing resources needed to offer the service is spread among the miners or validators running the blockchain that the project is built on.
Traditional businesses instead have to raise great amounts of capital to host their servers, pay for their cloud computing costs, and to scale their service in addition to hiring all of the people needed to develop and run their product.
“The crazy part of it all, is that because these businesses are token driven and the costs are distributed and operations are decentralized, it is FAR LESS EXPENSIVE to operate than a traditional centralized business,” he noted.
“So where a crypto based business competes with a traditional business, the crypto business may have a significate cost of capital and cost of operations advantage. There are a lot of financial institutions that should be concerned.”
Cuban provides Polygon (CRYPTO: MATIC) as an example of a crypto project — one that he invested in — that managed to jumpstart its operations in a way that required much less capital than a traditional firm would require.
This project aims to enable communication across blockchains connected to Ethereum (CRYPTO: ETH) to allow for transactions that are as cheap and as fast as possible.
Polygon charges a fee in MATIC in exchange for the service, the same token that is distributed among the network validators that provide the computational resources that the service uses to run.
While a traditional business would need to raise lots of capital to establish the infrastructure for the service to run on, Polygon only needed to write the software that puts the crypto incentives in place for others to step in and provide the infrastructure on their behalf.
“So why is this brilliant? If Polygon, or any of their competitors, took a traditional, centralized business path where they controlled and owned everything, they would have had to raise not just millions but potentially much, much more. Instead, they create a near zero cost token that they distribute. […] And it works for all involved,” Cuban explained.