Today the Financial sector contributes on an average of about 15-20% of GDP globally. The Financial markets drive the global economy but if we analyze the way the world has changed in the last three decades, the underlying infrastructure of the traditional financial markets has not been able to keep pace with it. It is still largely centralized and accessibility is a major challenge. On top of it, the lack of transparency has led human greed to find loopholes in the ever-burdening regulatory regime resulting in global crises like the 2008 financial meltdown.
The Fintech revolution in the last 15 years has enhanced the accessibility to the financial ecosystem but it is still insufficient and rife with its own set of challenges. The underlying infrastructure is still centralized and inefficient to cater to the global population. The users do not have control over their money and have to deal with expensive financial services, whether it be remittances, borrowings, or investing.
Then came the Bitcoin with underlying Blockchain Technology that decentralized the payment industry. The first time, it was possible to transact from peer to peer without any intermediary in a trustless environment. Payments being the heart of financial services, it was a matter of time before the decentralized economy expanded to other financial services like lending, investing, derivatives, etc. Now there are various startups who have forayed into multiple areas of finance to empower the financial economy with accessibility, decentralization, and efficiency in terms of speed of settlement and cost.
DeFi or more aptly called Open Finance
Decentralized Finance (DeFi) refers to democratizing the financial ecosystem using the decentralized, non-custodial infrastructure. It covers all the tenets of financial ecosystems like borrowing and lending, exchange and trading, investing, and risk management. It is a huge move from the current closed financial economy to open finance, making it available to the millions of underbanked or unbanked populations. Since the existing DeFi apps and protocols are completely decentralized, the term “Open Finance” seems to be used alternatively.
The Key Characteristics that Define a DeFi Concept or Product are:
- Open Source: The DeFi smart contracts are open source and available for anyone to audit and collaborate for innovation. This makes them composable so that different modules can be joined in various combinations to produce innovative products fit for varied user profiles or use cases.
- Interoperability: Today, the asset management in the DeFi ecosystem is largely restricted to one Blockchain network like Ethereum. Interoperability allows the networks to work together so that overall liquidity is enhanced and the user has more flexibility.
- Programmable: The DeFi apps and protocols are governed by code written in smart contracts. The business rules, permissions and transactions are secured by smart contracts bringing trust and transparency to the financial system.
- Accessibility: The DeFi apps and protocols are available to all without any bias. You just need a phone and internet connection to join the DeFi ecosystem and use it. There are various start-ups working in the area of usability so that anyone can interact with Blockchain protocols without the complexity of cryptographic keys and gas management.
This open finance paradigm offers multiple distinct advantages over traditional finance:
- First, the users take control over their assets without any centralized risk.
- The business rules and logic are whttp://kaushikservices.com/wp-content/uploads/2015/12/adfa2.jpgritten in open smart contracts that allow any user to audit the rules.
- The DeFi allows global outreach. Any user from anywhere can join the DeFi ecosystem and start using the applications/services.
- The DeFi protocols are open allowing you to combine the products of value to create an entirely new product. This is opening up space for innovative start-ups to design products required in today’s time.
- The products can be accessed using wallets like metamask, etc. This provides a single interface and lot of start-ups are working to make the experience user-friendly as well as secure.
Quite a few start-ups have built innovative dApps and Protocols in DeFi ecosystem. Some of the DeFi start-ups in different areas of finance are as follows:
- Credit and Lending – The DeFi lending platforms enable peer to peer loans to borrowers (individuals as well as businesses) without involving intermediaries. Examples are BlockFi, Compound, SALT, ETHLend, and NUO Network.
- Savings and Deposits – The DeFi players in the Savings and Deposits space provide user-friendly interfaces for users to deposit their crypto assets and earn interest on it. Most of the players are an alternative interface to different lending protocols. Examples are Dharma, PoolTogether, Linen App.
- Insurance – The DeFi players in Insurance space are primarily with peer to peer decentralized insurance for different types of insurance products like smart contract hacks, crypto assets, etc. Examples are Etherisc, Nexus Mutual, VouchForMe.
- Trading and Exchanges – The DeFi players in Trading and Exchanges are mainly with decentralized exchanges (DEX) which as compared to centralized exchanges operate without any central authority. Examples are AirSwap, Bancor, IDEX, Uniswap, Oasis.
- Payments – The DeFi players in Payments space are the protocols and apps that are helping increase the throughput of existing protocols like Ethereum to enable faster payment transactions and smart contracts execution. Examples are – Lightning Network, OmiseGO, Matic Network, xDai Stable Chain.
- Stablecoins – Stablecoins are asset-backed cryptocurrencies, typically backed by fiat currency like USD or commodities like Gold etc. The DeFi players in this space are helping reduce the volatility of cryptocurrencies so that the latter can be used for payments and commerce. Examples are DAI, USDC, Paxos Standard.
- Tokenization of Assets – The DeFi players in this space offer tokenization of digital and physical assets so that can be transacted in the trustless way leading to better liquidity, wider reach, the efficiency of transactions and better transparency and traceability. Examples are Polymath Network, Securitize, Tokensoft, OpenLaw Finance, Harbor.
- Staking – The Proof of Stake is becoming the most popular consensus protocol in permissionless Blockchain networks. The DeFi players in this space are mainly Staling Pools or Staking as a Service provider that helps users to stake for these protocols and earn rewards. Examples are Chorus One, HyperBlocks, Stake Capital, SparkPool, Stakin.
- DeFi Infrastructure – The players in this space are building the building blocks of DeFi ecosystem whether it be Protocols or frameworks that power the various DeFi apps and protocols. Examples are Ox Protocol, Bancor Protocol, Chainlink, Kyber Network, Hydro Protocol, RSK, Ren, Uniswap, Zeeve Blockchain Automation Platform.
- Decentralized Identity – Decentralized identity helps users control and protect their own identity. Examples are uPort, Civic, CoLendi, Sovrin.
- Prediction Markets – The players in this space provide platform to trade the outcome of events. The prices based on wisdom of the crowd is indicative of the probability of the events. Examples are Augur, Gnosis.
- Analytics – The players in this space are building analytics platforms that helps crunch the data on DeFi protocols to enable decision making, predictions and monitoring. Examples are Alethio, Chainbeat, DeFi Pulse.
- Asset Management
– The players in this space are helping users to access various DeFi protocols and services in a user-friendly way by means of wallets, apps and intuitive dashboards. Examples are Coinbase Wallet, Eidoo, imToken, InstaDApp, MetaMask, MyEtherWallet.
The DeFi ecosystem is growing with newer start-ups building different protocols, apps, frameworks, and interfaces to overcome the DeFi challenges. The current size and usage are still very small as compared to the traditional phase but the growth and promise are encouraging to see the world moving from centralized and risk-prone financial economy to decentralized and open economy.
Sofocle is one of the leading Blockchain companies building the futuristic web using Blockchain Technology. Sofocle has helped various start-ups and enterprises build innovative products and solutions using Blockchain and Smart Contracts. If you have a DeFi idea or concept and want to build the next big thing, connect with one of our DeFi services experts.