DeFi can address many of the flaws in the existing financial systems, including giving the unbanked access to the financial system. In the coming years, DeFi can offer improved transparency, more robust security while replacing many of the outdated processes.
DeFi services will be decentralised Apps (dApps) that operate on a blockchain, for example, Ethereum. They leverage smart contracts to automate many of the functionalities in financial services. Although such dApps remove the need for trust in the absence of a centralised governing body, any organisation developing dApps requires a strong focus on data governance.
Traditional financial systems use systems of banks and intermediaries to complete a single transaction between parties. This can take up several days and comes at a cost. A decentralised financial system is one where transactions occur between one individual and another individual, with no middlemen. Governed by smart contracts, the transactions are (nearly) instant and (almost) for free.
One of the main advantages of DeFi is that it is borderless. Anyone, anywhere with a smartphone and access to the internet can use these financial services. This will revolutionise banking for the poor and unbanked. All of a sudden, they can securely store value. Using security tokens, they can invest anywhere in the world in anything with the click of a button.
One of the most prominent DeFi platforms is the decentralised lending platform MakerDAO. In recent months it has seen impressive adoption of its stablecoin Dai. MakerDAO is a decentralised autonomous organisation on the Ethereum blockchain, and it is the crypto version of a pawn shop; instead of leaving a watch or a ring, the person leaves crypto, i.e. ETH. Whenever the user pays back the DAI received when leaving the ETH, the ETH is returned. MakerDAO is a popular crypto pawnshop as currently around $300 million ETH is locked away in smart contracts.
Compound is an algorithmic, autonomous interest rate protocol built for developers, to unlock a universe of open financial applications. It enables individuals to borrow up to a percentage of their token’s value with no fees and the immediate ability to liquidate. They aim to enable crypto that sits currently idle on exchanges to yield interest while maintaining liquidity.
Centralised exchanges are well-known, but although they might be easy to use, they have one major Achilles heel; they are centralised and can, therefore, be hacked. We have seen many hacks over the past years resulting in millions of dollars in lost crypto. Decentralised exchanges fix this flaw. There is no centralised governing entity. Instead, smart contracts engage in decentralised exchanges that execute automatically and require no intermediary. All assets are controlled by their owners and the system only plays matchmaker to connect buyers and sellers with seamless algorithms.
These DeFi startups provide simple open marketplaces where anyone can exchange goods and services built along with decentralised architecture. Bounties Network offers a platform to create projects, collaborate and get paid in crypto for doing jobs in any domain. Gitcoin is a decentralised version of Github and is a marketplace for open source development work. Contrary to popular traditional marketplaces like Amazon, these platforms themselves don’t exert control over their marketplaces. Buyers and sellers dictate the terms of the marketplace without interference of any central authority.
Decentralised escrow services where traders can trade safely. The escrow holds onto your currency while the trades are done on off-chain or on-chain atomic swaps that are seamlessly handled by smart contracts. The blockchain itself functions as the escrow in many cases, with negligible risk.
Banks, insurers, and investors, in particular, have noted the scope of DeFi for their industries, especially where decentralisation can dramatically alter existing services to improve efficiency and lower costs in a single move.
Decentralised finance is equipped to fundamentally change the world economy. With blockchain technology spearheading the front, decentralisation is set to bring back privacy, trust, and let individuals create a future where a transparent, secure, public system is in control once again.
DeFi will enable the unbanked to join the economic system, it will lower the cost of doing business, and it will offer new investment opportunities for anyone across the globe. It will empower individuals and organisations and make them less reliant on the ‘too big to fail’ financial institutions that brought chaos during the Great Recession. The future is decentralised, and that certainly applies to the financial sector.