Blockchain evolution in finances — Understanding Decentralized Finance (DeFi)
Depending on who you ask, Blockchain and particularly Cryptocurrency is either a fool’s errand or the future of money. Cryptocurrency and Blockchain have become a fixture of modern-day technology with Bitcoin and Ethereum drawing attention to the BlockChain network with increased transaction speed, elimination of middlemen and more freedom in the control of finances.
However, cryptocurrencies constitute a fragment of the potentials of the BlockChain network particularly as it relates to finance.
Further in here, I am going to shed more light on deploying BlockChain technology in decentralized finance (DeFi) all geared towards understanding the concept; what it entails and the potentials therein.
What is Decentralised Finance?
In an interview with Quartz, Brendan Foster, co-founder, and COO of Dhama, a crypto lending service described Decentralised Finance as “the idea that financial services can be 10x better than they are today. DeFi is more global, accessible, more accessible, and more transparent than traditional financial services”.
I would define decentralized finance (DeFi) as an open financial sector that provides financial services using software that is built on top of public blockchains. The decentralized finance (DeFi) sector will see the future of financial services in a digital light, the same as traditional finance through financial technologies.
Both financial sectors aim to reinvent financial services as automated software products with programmed business logic. At a high level, DeFi aims to create a lot of the existing financial systems we have today (e.g. borrowing, lending, derivatives) but in a manner that is typically automated and removes the middle man. DeFi might then be described as the internet of money.
Traditional vs. Decentralized Finance
The current global financial system has proved to be inefficient in multiple aspects.
With so many financial intermediaries present in the system, cybercriminals target financial services 300 times more than other sectors. PWC analysts claim that 45% of financial intermediaries such as money transfers and stock exchanges suffer from serious cybercrimes every year. The growing number of cyberattacks leaves the public at risk of financial loss in billions of dollars yearly and data exploitation. Further, the existing financial system deprives millions of people of basic financial services because of barriers such as location, wealth, and status. It is estimated that about 1.7 billion people globally lack access to financial services worldwide. This constitutes a large number of people who cannot enjoy basic financial services.
A decentralized financial system based on a public blockchain would provide access to financial services to everyone, regardless of their location and status thereby providing financial services for the over 57% of the world’s population who now use the internet on a regular basis through special plug and play applications- Decentralised Applications (DApps) which is available for smartphones, exploiting the cheaper access to the internet and smartphones across the globe.
Numerous startups and companies have recognized the potential of open-source networks to change and decentralize economic activity. Networks built on the Blockchain network could solve the issues of the traditional financial system because of their permissionless nature.
Blockchain could replace the current financial system because it is permissionless, decentralized and transparent.
What this means is that:
- with a decentralized system, anyone in the world can connect to the system from across the world with a smartphone which means more access to financial services for those who hitherto would be deprived of such.
- the elimination of the effect of data loss which is a staple of banking systems. Since there is no centralized server of the body of authority that controls it, Blockchain keeps records of transactions scattered across thousands of devices.
- there is elimination of the chance of fraud being conducted on the system since all transactions conducted on the Blockchain is made public.
How can Decentralised Finance be Applied?
Advocates have said that DeFi has the potential to transform the lives of the world’s unbanked — and make life more affordable for everyone else.
Taking a cursory look at the remittances market, in which billions of dollars are transferred across borders every year, the fees paid for transactions are often extortionate. Reflecting on this, Vitalik Buterin, a leading crypto guru and co-founder of Ethereum, recently noted that moving money between accounts using banks is “insanely inefficient”, adding that international payments are “even worse”. DeFi services have the potential to slash these costs by more than 50%. For example, Bitcoin enables peer-to-peer payments at very low transaction cost and very refined price granularity. A case in point is the recent purchase of an art piece for U$0.00000004143 which was transferred almost instantaneously using a payments network built on top of Bitcoin. To put this amount in perspective, consider that one billion of these pieces would cost just U$41.43.
What this shows is DeFi’s potential for improving the facilitation of micropayments, microloans, and opening up new monetization strategies used in pay-per-use subscription, gaming, and online advertising. Not only does this offer an incentive for better productivity, but it will also help support small businesses and economies across the world.
On the lending side, even though peer-to-peer crypto lending applications are in the nascent stage, their popularity has been growing at a rapid pace. DeFi lending taps the blockchains’ ability to settle transactions using smart contracts instead of an intermediary, significantly reducing counterparty risks and cost. At the same time, typical annual percentage rates are lower than those available from traditional lenders.
Moreover, since no credit checks are performed on some platforms, DeFi-enabled lending has the potential to reach many more people – especially in developing markets.
Other forms of decentralized finance include stablecoins, a type of digital currency that shields consumers against the volatility of crypto by being pegged to another asset such as dollars or gold. Tokenization means real-world assets such as art, property, and commodities can be owned and traded on the blockchain, while decentralized exchanges mean users hold on to their funds at all times — reducing the risk of cyberattacks, a scourge that many centralized platforms have been struggling to shake off.
DeFi has witnessed significant growth particularly in 2019. According to Defipulse the amount in dollar terms locked into decentralized finance hit a new all-time high of $688 million.
Top 3 projects in DeFi includes:
Maker $328.4M with a 47.71% dominance, Synthetix $180.2M with a 26.19% dominance and Compound $99.7M with a 14.49% dominance.
It is important to note that when analyzing the positive trend of the sector, it is clear that it is only a matter of time and 9 zero figures are not so far away, precisely because the potential of DeFi can be applied in different sectors such as lending, payments, derivatives, and assets of various kinds.
TROY and Decentralised Finance
According to research by cryptocurrency exchange giant Binance, Troy is a global prime broker specializing in crypto trading and asset management. Troy provides crypto brokerage services for institutional clients and professional traders including spot & margin trading, derivatives, data, custody, lending and staking in a single account.
Troy is building a sustainable network of brokers who delegates customized brokerage services directly to clients in different target regions.
Troy aims to build a healthy and sustainable economic model by offering a full stack of integrated crypto trading, custody and asset management services. The revenue model includes:
- Trading commissions and fees for settlement and custody services.
- Spreads on client’s margin financing positions, cash or token financing.
- Fees for value-added brokerage services including asset management, automated risk management, data analytics services, etc.
IOST and Decentralised Finance
As it is known, IOST is committed to developing and maximizing the potentials of Blockchain to provide access to people across the globe. It is with this in mind that IOST announced its partnership with TROY, the global prime broker specialized in crypto trading and asset management. Together with TROY, IOST will conduct comprehensive cooperation in areas including technology study, development, mass adoption, and Decentralized Finance (DeFi). IOST is capable of operating high degrees of scalability and decentralization, delivering optimal performance for developers and enterprises, thanks to its unique PoB consensus mechanism. IOST shall work with TROY to develop layer 2 solutions that can drive DeFi innovation with a high throughput capacity.
In this partnership, IOST will utilize its mature and advanced scaling technology to assist TROY in developing a scaling solution on Layer 2 off-line trading layer in TROY network. In return, TROY will provide IOST with multiple DeFi adoption scenarios, such as applications in the trading market and clearing and settlement. It is the aim of TROY and IOST that their alliance will bring about significant growth in the DeFi.
Fish n Chips DeFi
A few days ago, Guppy launched the first world’s self compounding contract DeFi Fish n’ Chips on IOST with contract balance reaching close to 30 million IOST. This shows the endless interest in DeFi by the community.
The adoption of Blockchain technology and the spread of cryptocurrency based on financial services would shape a new world of decentralized finance. This would be characterized by wider global accessibility to financial services, safer transactions, and lower transaction costs. With IOST collaborating with Troy in creating a new frontier of decentralized finance services, the potential of DeFi is massive.
- What HUSD integration means for IOST Blockchain January 15, 2021
- IOST to Lead the Digital Currency Transformation October 19, 2020
- Interview with RAMP DeFI’s CEO Lawrence Lim October 12, 2020
- Building on IOST with IOST .NET SDK by Sonata September 8, 2020
- Recap of IOST AMA with Aegis CTO Christopher Holm September 1, 2020