DeFi offers access to instant loans with low interest rates, online payments without transaction costs, P2P insurance, decentralized identities, and decentralized stock exchanges (DEXes) without intermediaries and without commission costs.
DeFi could play a significant role in the financial development for all the companies involved in the financial sector. Also, it could indicate a huge opportunity for any country to come forward. This could be achieved with tax incentives for the startup approach, but also with the targeting and support of DeFi technoblasts at the level of program funding.
According to an interview conducted by Cyprus Mail, the man behind eCREDO, a person with more than 20 years of experience in the banking sector and an incomparable expertise when it comes to financials and risk management, Dr. Marios Kyriacou states, “Banks in the conventional banking system don’t like it simply because it is serious competition. You saw what happened with Facebook’s Libra? Whereas end users manage decentralized finance. It means that processes are much more cost efficient, because there are fewer agents in the middle, it allows the market to speak for itself. You have the efficient market hypothesis in the works and prices really reflect supply and demand.”
DeFi stands for Decentralized Finance and refers to a financial ecosystem based on blockchain technology. Blockchain technology became known worldwide through the digital currency Bitcoin.
What most people are unaware of is that digital currencies are just a small application of what blockchain means. Bitcoin and other digital currencies are just the tip of the iceberg, the top that is visible. Most DeFi applications are built on the Ethereum platform, but there are other protocols used in DeFi applications.
DeFi aims to create an open and transparent financial environment that is accessible to all without central control and without intermediaries. It includes a wide variety of financial applications such as payments, lending, interest, insurance and transactions through decentralized stock exchanges. These applications are now available to everyone through the use of decentralized blockchain networks and smart contracts.
An interesting feature of DeFi applications is the ability to synthesize different protocols for creating new services. In the backend, DeFi protocols act as a software library, allowing the connection of different smart contracts, thus creating new applications. At this point, we must mention the Chain.link project (LINK) which through a data-oracle system, for data confirmation, promises security and reliability throughout the process. This can be especially useful for synthesizing DeFi applications by reducing security vulnerabilities and tackling cyber fraud.
Decentralized Finance includes many different categories of financial services. One of them is Stablecoins.
Stablecoins are digital currencies based on blockchain technology. However, unlike Bitcoin, a Stablecoin is pegged to a National Currency such as the US Dollar or the Euro. By linking it to a National Currency it means that the exchange rate is fixed at 1 Stablecoin for 1 dollar or 1 euro, respectively. Stablecoins are now rampant in Asia where Chinese workers use them to send money to relatives in China without paying commissions and exchange rates.
Stablecoins are divided into four major categories:
(1) Fixed currencies covered by national currencies (supported by equivalent national currency reserves, as stated above)
Basic Projects: True USD (TUSD), Tether (USDT), USD Coin (USDC)
(2) Crypto-stablecoins, covered by cryptocurrency reserves, instead of national currencies
Basic Projects: Multi-Collateral DAI (covered by Ethereum and ERC-20 tokens)
(3) Fixed currency with commodity coverage, backed by financial products mainly gold
Basic Projects: Paxos Gold, HelloGold, Tether Gold
(4) Unsecured Stablecoins, which are not covered by a reserve and are based on smart contracts and algorithms to maintain price balance.
Basic Projects: Terra.money
According to the World Bank Global Findex database, there are approximately 1.7 billion adults left without a bank account (2017 figures).
DeFi payment services aim to create an open payment ecosystem without centralized control and without the need for a bank account. Decentralized payment services are very promising for the people of the earth without access to banking services.
In the new world of DeFi, anyone can borrow or lend money without the need for a bank account. Everyone’s digital assets are used as collateral in case of default. MakerDAO and Compound are the most important projects in this category. DeFi offers significant advantages to lenders and borrowers over traditional banks, such as:
- Direct transactions, without documentation.
- Elimination of bureaucracy, as no approval is required.
- Complete transparency and equal conditions for all participants.
- Available without discrimination, to any person on the planet, without the need to prove their credit score.
- Lower costs for borrowers and lenders, as there are no intermediaries anywhere.
- Exclusive digital warranties.
Basic Projects:
- DAI operates with digital currencies such as DAI, ETH and MakerDAO. The interest rate is variable. The warranty required is 150% and the liquidation penalty is 13%.
- Compound is based on Ethereum and uses an algorithmic process to determine interest rates based on supply and demand. The project operates with digital currencies such as DAI, ETH, ZRX, REP and BAT. Interest rates are variable. The warranty required is 150% and the liquidation penalty is 5%.
- Atomic Loans protocol allows borrowers to easily lock their Bitcoin as collateral and borrow fixed currencies based on Ethereum USD (US dollar equivalent).
Staking is similar to earning interest through a savings account at a commercial bank. However, it involves a different process without a bank account. At present, this process only applies to validators of an encryption project who, in return, are rewarded with interest.
DeFi creates new opportunities and new data in the insurance industry. For example, the introduction of Peer-to-Peer insurance. P2P insurance operates as a human-centered risk-sharing network. That is, a group of people come together to insure against a common risk, without the participation of an insurance company.
A Decentralized Stock Exchange (DEX) provides the ability to exchange digital assets without the need for a trading account or intermediary. Each transaction takes place directly between the users’ wallets (blockchain wallets). A smart contract allows the automatic matching of supply and demand (buyers / sellers). There are many benefits to investing in a DEX:
- Without intermediaries (lower charges than traditional central transactions).
- Minimization of spreads (difference in purchase / sale price) of transactions.
- Allows true anonymity of transactions.
- Allows the issuance of an unlimited number of digital assets (synthetic digital assets, etc.).
- Allows the introduction of custom parameters in the trading process.
According to the World Bank Global Index again, there are more than 1 billion people without a National Identity worldwide. In poor countries, 1 in 2 women do not have an identity, thus limiting their access to basic economic and political activities. However, many of these people have access to a cheap smartphone. Therefore, a decentralized identity can play an extremely important social role in these underdeveloped countries.
The DeFi financial universe needs a blockchain framework to work. Ethereum is the platform of choice for the vast majority of DeFi developers. It is difficult to find a branch of ‘financial becoming’ that will not change permanently and irrevocably from DeFi.
