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“DeFi” is a word that gets thrown around a lot in the cryptocurrency ecosystem without actually realising its potential.
The world of traditional finance is facing a new challenge aside its usual pangs and pains, this time a technological contender has entered the ring that goes by the name of decentralized finance (DeFi). This new economic bastion has been birthed by blockchain and cryptocurrency technologies, creating unprecedented opportunities for the entire world. From the tech-savvy investor, the unbanked, and to those living under tough economic conditions, DeFi may offer financial liberty like no other technology in history.
Currency in Control.
Not to be confused with financial technology (FinTech), where we have challenger banks like Monzo, and stock trading apps like eToro; DeFi is built upon a technology with a very specific purpose, decentralization. Typically, your finances are handled by centralized entities, singular authorities who either issue the currencies we use, or manage and regulate them - this includes banks, FinTech companies like PayPal and the like. As mentioned earlier, DeFi is built upon blockchain technology, most commonly on the Ethereum blockchain, though that is a whole other topic to explore itself. Regardlesss, blockchain is a new and exciting slice of tech that has proven its worth with thanks to the outstanding performance of Bitcoin (BTC) over the past few years.
In short, it all began when enigmatic entity Satoshi Nakamoto created the first ever blockchain on which the premier cryptocurrency, Bitcoin, would then exist. Here he proved that the technology has the capacity to create a new financial ecosystem away from centralized systems, making private peer-to-peer (P2P) transactions of value a possibility. To many, this is considered where DeFi began.
Soon, tech-savvy early adopters caught whiff of the potential locked within this new currency/asset/property, and began building upon it, around it, for it. Once developers and entrepreneurs had begun experimenting with blockchain technologies, novel innovations sprouted and eventually, an incredibly valuable industry.
It wouldn’t be long until other cryptocurrencies emerged, with the number of cryptos on the market now in the thousands, all offering something new, original, nuanced or in many cases, completely useless. However, there are also cryptocurrencies known as stablecoins that could be considered as the most critical component to the DeFi ecosystem next to Ethereum’s native crypto Ether (ETH), providing a solid financial foundation for anyone with access to the internet.
Stablecoins are unique in that they don’t change value as they are pegged to either a basket of assets, fiat currency or both, thus ensuring that their price remains, as the name implies, stable. Prime examples of stablecoins include Tether (USDT), Dai (DAI) and USD Coin (USDC). In a report from the Bank of International Settlements (BIS), they note that Bitcoin and other cryptocurrencies “failed to provide a reliable and attractive means of payment or store of value.”
The BIS also argues that regardless of the modern financial system and its many improvements, it has two critical flaws. One being that there is no “universal access to financial services”, citing the 1.7 billion adults in the world who have no access transaction accounts as clear evidence of this. The second matter, is that cross-border retail payments aren’t quite up to scratch as they are slow and costly.
Although the BIS report makes acknowledgements of the numerous impacts that stablecoins can have on economies, individuals and enterprises, both positive and negative, there is one key takeaway to note. The BIS is of the impression that for stablecoins to meet the needs or the “unbanked and underserved”, then they need to prove themselves as the safe stores of value they present themselves to be. Meanwhile, that experiment is taking place across the world with the many active participants of DeFi.
DeFi in Action.
The DeFi ecosystem is a sea of services and platforms tailored to meet the needs of the digital economy.
As a basic means to enter the DeFi landscape, access cryptocurrency and browse dApps to your hearts content, look no further than MetaMask. Though classed as a ‘custodial service’ as it acts as a cryptocurrency wallet, MetaMask is also a portal into blockchain-based applications as well as offering several ways to purchase cryptocurrencies that can be sent, converted, and invested in numerous ways.
Through this and other custodial platforms like MyEtherWallet, users can access some particularly attractive opportunities, with some of the most popular forms being credit and lending platforms like MakerDAO and Compound, both of which at their core are beholden to the power of stablecoins.
It’s worth noting here that even in these strange times, the transfer value of stablecoins exceeded $400 million post-market crash in mid-March, suggesting that in times of global economic turmoil, this technology is proving to be something of a saving grace.
MakerDAO, the creator of DAI, a decentralized stablecoin, is home to a platform on which platform users can trade, lend, borrow, and earn interest on their savings in an extraordinarily simple fashion through the Oasis platform. With DeFi, the aim of the game has to be accessibility – If it isn’t easy to use or understand, who’s going to use it?
Similarly to this we have Compound, another protocol through which users can lend and borrow cryptocurrencies, or earn interest on their holdings amongst many other financial interactions available. Last November the firm raised a further $25 million for their platform in order to grow their crypto-lending capabilities, signalling a demand of supply from the community at large.
Tackling the realm of banking the unbanked, managing digital assets and providing financial services is OmiseGO, a P2P network designed to create instantaneous transactions across boarders, asset classes and applications. Based in Thailand, OmiseGO uses OMG tokens as method of payment; with the aim of replacing SWIFT as the protocol, according to sources, will “enable currency transforms between all platforms, such as from PayPal to AliPay, from Wells Fargo to Bank of America or from crypto to fiat, etc.”
Power to You.
For as long as stablecoins continue to proliferate alongside DeFi products, the traditional finance as we know it is beginning to look a little outdated. According to Statista, at least 4 billion people around the world have access to the internet and do so through their mobile phone. Now, with a few simple taps to a screen, an individual can migrate their finances away from their once-centralized sources, to a burgeoning digital economy, where the user is in total control of their finances. They can also do this privately, with no authority regulating their actions.
A prime example of DeFi proving its worth is in the case of Venezuela and its present economic woes. During the period of hyperinflation, Bitcoin became a safe haven asset despite its volatility. Data from CoinDance shows that Venezuelans purchased high volumes of BTC during the peak of their troubles.
Though this barely scratches the surface and, if anything, the above mentioned cryptos, platforms, protocols and technological marvels are the icing on the cake. In the next DeFi roundup, we’ll take a closer look at how these tools have impacted the world, and more specifically, emerging markets around the world.