tl;dr: When you can tokenize anything, you can split assets into components. This gives you flexibility.

It’s been nearly a year since the “Summer of DeFi” and we’ve seen hundreds, if not thousands, of experiments creating new financial applications that were simply not possible before the arrival of decentralized networks.

What makes DeFi so powerful is the fact that any element of the financial transaction can be tokenized or managed by a smart contract. The same transaction would have either been impossible or just comparably rather expensive and cumbersome to manage in the existing financial system, given the overhead.

One of the experiments, which I’ve mentioned before, is Alchemix.

In Alchemix, you take out a loan today and pay it back in the future. Sounds familiar, right? Well, the thing is that, instead of digging into your pocket to pay the interest in order to get the capital back, the protocol takes your capital, invests in another yield bearing asset and then pays itself back as the underlying protocol generates dividends.

It’s kind of like a Certificate of Deposit, but you get all future payments in one lump sum today.

Another one that is interesting is Element, which I read about on the Placeholder blog.

If I am following it correctly, basically it works like this.

When you deposit your assets into Element, you get two tokens back. The first represents your principal, the second your interest, which is (and I don’t fully understand yet exactly how this works), a fixed rate of interest. I get the benefit, but not sure I fully get the mechanics yet. I probably need to read the blog post again.

Anyway, the beauty of having two tokens is that you can sell or leverage them because they are assets. If you need liquidity, you can sell your “principal token” (presumably at a discount) or your “interest token” to someone who wants ongoing payment streams.

You can also use either one of them as “proof of assets” and thus as a form of collateral to increase your own capital efficiency.

Imagine taking the “principal” token to a lending protocol and using that to secure a loan. If you default on the loan, they get your principal token.

It is the epitome of the so-called “money legos’ that DeFi represents.

This is what makes crypto programmable money, giving flexibility that didn’t exist before to markets that didn’t exist before.