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Market Research & Development

What is Decentralized Finance (DeFi) and why it is innovative

Introduction

In the last few months DeFi (Decentralized Finance) has found more and more space in the economic and market context. This trend is now in steady growth and is generating a real revolution in the field of finance with such a development potential for that a future mass adoption, currently still in its embryonic stage, is expected.

What is DeFi?

DeFi is an innovative financial ecosystem that refers to financial applications based on the Distributed Ledger Technology and Blockchain. More precisely, the concept of Decentralized Finance refers to an approach that aims to create open source financial services through public and decentralized, permissionless and transparent platforms that are publicly available and operate without any central authority and without the intermediation of financial institutions. In this scenario, users would therefore retain full control of their financial activities by interacting with this ecosystem through decentralized applications, the so-called Distributed Applications – DApps (P2P) that operate exclusively through blockchain.

The Ethereum platform and the smart contract

DeFi builds on Bitcoin’s and in general cryptocurrency pioneering concepts, but offers additional types of services. The DeFi system is not based on the Bitcoin network, but mainly on the Ethereum decentralized platform, that supports smart contracts, the software that are automatically executed by the network and that make up for the absence of the traditional intermediary making the financial transactions completely autonomous and free from administration overhead. The real paradigm shift is that the financial management takes place through an automatic mode implemented by open software verifiable by anyone, whose behavior is therefore predictable, based on pseudonym and the basic market logic. In short, the DeFi ecosystem completely eliminates the discretion of classic intermediaries, delegating the entire management of the system exclusively to smart contracts. This is only a first step towards the creation of a parallel financial system that is supposed to overcome those limits now evident and intrinsic in the classic financial modus operandi.

DeFi applications

DeFi’s applications are numerous, a major one is certainly open and decentralized lending and borrowing, which has clear advantages: by using public blockchain platforms the counterparty risk is minimized and lending and borrowing become consequently cheaper, faster and more accessible. Banking monetary services are also a common use case and include granting of mortgages and taking out insurances, once again eliminating the significant costs that in the traditional process are mostly caused by the involvement of the involved intermediaries: thanks to the use of smart contracts, underwriting and legal costs are significantly reduced. Blockchain technology through DeFi can also be used to issue and enable ownership of a wide range of conventional financial products, favouring projects that could, for example, enable the creation of decentralised forecasting markets. As outlined above, the greatest innovation and the resulting advantage of DeFi is the easy access to financial services. By avoiding the obligatory intervention of institutions as mediators, DeFi applications are much more efficient and faster, allowing users to maintain constant and direct control over their assets. In addition, another significant advantage is that the DeFi low cost and open system allow a particular ease of access to those people who remain for various reasons out of the current financial system whose services usually exclude low incomes citizens. In the DeFi approach, however, costs are significantly reduced. One of its main claims is in fact “bank the unbanked” which implies the involvement of low income potential customers.

Between innovation and risk

DeFi goes beyond the concept of open banking which, while guaranteeing access to data from banking and financial institutions and making new types of products and services possible, stand inside the traditional financial context. The world of Decentralized Finance offers users a completely innovative perspective to look at the financial world dynamics: the open finance, independent from the current infrastructure, is placed in the foreground and promotes new ways of interacting with financial instruments. The DeFi ecosystem, with its promise of decentralization, is certainly an attractive idea, but before we will see a real mass adoption of its new approach, there are some aspects to tackle: alternative investment systems create interesting diversified scenarios and are accessible to a very wide range of users, but the DeFi field, being extremely dynamic and autonomous, is necessarily potentially more subject to changes, exposing customers to a higher risk potential than the traditional model. A solid organization of DeFi with a clear information process to safeguard savings on decentralized financial platforms is the basis for the spread of a system that is already today evidently more performing than the traditional one due to its intrinsic characteristics.

Conclusion

Anyway, the DeFi is currently in continuous growth: traditional financial services and DeFi applications are moving on converging paths, separated by an ever decreasing distance. Whatever the future scenario that awaits us, we are undoubtedly already facing a progressive change in financial services, within which DeFi proposes a radical rethinking of the financial system: shifting the power of action from centralized organizations directly into the hands of the community and the individual himself, an autonomous and independent entity with the prospect of an increasingly less centralized and more automated future.

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Market

The Rise of #DeFi

Coinbase CEO Brian Armstrong said that the crypto-winter only exists for coin prices and that it’s summer for innovation.

This seems to be true, in fact, during the apparent calm, a lot of serious teams have been embracing and developing the underlying technology to achieve real results. One of the key developments that resulted from this period is the emergence of Decentralised Finance (DeFi) applications, who will likely drive the next wave of disruption.

DeFi is an umbrella concept describing financial services built on top of public blockchains like Bitcoin and Ethereum. Three core principles have been proposed to define the values of any company that wants to be part of the #DeFi movement:

  1. Interoperability and Open Source: Members of DeFi take interoperability into account when building their projects. This helps strengthen the compounding effects of all our projects as a whole. Open sourcing helps us reach this goal by allowing us to collectively understand how all of our products can be woven together on a technical level.
  2. Accessibility and Financial Inclusion : Members of DeFi strive to create a financial system that is accessible to anyone with an internet connection. The vision of DeFi is a world where value flows freely, regardless of one’s geographic location.
  3. Financial Transparency : Members of DeFi believe that financial services should not be built in opaque silos, but rather that market-level information should be transparent to all participants while still preserving individual privacy.

As mentioned DeFi applications aim to improve on different aspects of the current financial system through the introduction of a decentralised layer in order to disintermediate rent-seeking middlemen. As of today many different use cases for DeFi applications exist. Examples include:

Consistent among all of these services, is that it requires no third party, bank or clearing house, and often is entirely permissionless.

DeFi is advantageous compared to fintech mostly because it provides some extra functionality and fewer operational risks thanks to its decentralized nature of minimizing trust at the software level, which in turn reduces the bureaucracy compared to fintech (banks are still disposing of the apps users funds and data).

There is a number of other reasons giving DeFi application traction as a new tech layer set to re-invent conventional financial instruments. Some of them are:

  • DLTs are able to ensure that the individual is the sole custodian of their assets at all times (provided that the individuals directly control their private keys).
  • Due to DeFi’s open source nature, it caters to an increasingly large pool of developers, thus enabling virtually unlimited room for experimentation in the financial services sector.
  • Building on the previous point, it is likely that through DeFi, the digital economy will move from digitalised versions of legacy assets, to completely new classes of digitally native assets.
  • Blockchain assets are inherently accessible and transparent, so for example, issuances, repayments, and loan terms are both human and machine readable.

At the end of the day, DeFi is obviously in a very early stage, but is a promising movement that has the potential to redefine many aspects of the present day financial services and could subsequently drive mass adoption.

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Market Uncategorized

Areas of use of Blockchain technology

Blockchain has become a term so abused that it is difficult to understand, given the vast and indefinite technological environment to which many would like to apply it. This is due to the excessive hype that accompanied the initial discovery phase of this new technology, where blockchain was advertised as a magic recipe capable of innovating any business. In 2017 and the beginning of 2018 blockchain has enjoyed great popularity thanks to the prodigious increase in the price of cryptocurrency and the rapid and impetuous success of tokens.

All this has generated great expectations of innovation and technological improvement, so many companies have felt compelled to include blockchain in their marketing plan, indicating it as a factor in the success of their business, even before having evaluated and thoroughly tested it.
When the speculative bubble burst and the ambitious promises had to leave room for the evidence of the facts, it clearly emerged that blockchain is not the panacea for all businesses and that its best application is limited mainly to certain areas. Furthermore, it is clear that the illusions of its rapid implementation and consequent immediate success of the relative products derive from a poor study of technology and a superficial understanding of its limits and opportunities.

Let’s see below what are some areas in which blockchain today shows real added value compared to other existing technologies:

Digital currency

The first and still most important application of the blockchain technology is that of allowing the creation and transfer of cryptocurrency without the need for any intermediary. The cryptocurrency native to a specific blockchain (Bitcoin, Ethereum, Ripple, EOS, etc.) and tokens created in a personalized way, represent a new way of transferring value.
Most important use cases:

  • Payments
  • Exchanges
  • Loyalty Systems


Financial sphere

The traditional financial system can be rethought and rebuilt over a blockchain infrastructure that offers security guarantees, automation and programmability of assets, disintermediation, efficiency and speed, superior to current systems. The audit and transparency of these systems, combined with the borderless nature of technology, make blockchain the perfect financial protocol.
Most important use cases:

  • Digital Asset Trading Platforms
  • Automation of financial products and services with the use of Smart Contracts
  • Tokenization of physical and digital assets
  • Financial inclusion for unbanked


Crowdfunding & Fundraising

Financing of a new business project or raising capital for an existing company can be more effectively implemented using a token. It represents rights and / or utility that can be transferred and exchanged more easily and quickly on the market. The token offers to companies an opening to international investment markets. In countries where regulation is clear and lean, it offers more opportunities to start-ups, thanks to easier and faster access to potential investors.
Most important use cases:

  • Financing of a future project (ICO, DAICO, IEO)
  • Capital raising (STO)


Certification and Copyright

The certification or notarization of a digital data on blockchain creates a non-modifiable register that can be used as proof of existence of that data. This applies to certificates and educational qualifications, which can be rendered demonstrable and non-falsifiable. In the same way it achieve the confirmation of authenticity of a product in supply chains where counterfeiting is otherwise difficult to verify.
Most important use cases:

  • Academic and professional titles
  • Anti Counterfeit Products
  • Verification and economic management of copyright


Digital Identity & Privacy

Digital identity is an increasingly important and delicate aspect of our lives, crucial for security and privacy, fundamental for democratic access to the online world.
Current authentication systems require the registration of personal data and the sending of identity documents that are not born natively digital. The security and privacy of such data are often violated without the users being able to defend themselves in any way. Blockchain, through public and private key pairs, and a cryptographic management of data, can greatly improve the current situation and provide a more efficient ID in line with privacy. Furthermore, there is no central entity that owns the data and can therefore be easily attacked.
Most important use cases:

  • Decentralized authentication systems
  • Management of personal data
  • Recognition and identity documents
  • Healthcare data
  • Online voting systems


Supply Chain Management

The complexity and quantity of subjects involved in supply chain management is now resolved by a plurality of systems, both online and offline, which make management very demanding and data exchange is not very efficient and verifiable. Using a common decentralized infrastructure on which to build shared applications among the various parties involved in the supply chain, up to the consumer, constitutes a great simplification and a guarantee of greater reliability of the information exchanged.
Most important use cases:

  • Open protocol for product history
  • Traceability systems and transparent data connection


Integration with other technologies

So far we have listed some of the most well-known areas, which represent the most common cases of real use developed in the industry. However, there are other interesting areas of real added value for the application of blockchain technology. These areas can be closely integrated with other technologies, or represent different products and services.
Most important use cases:

  • Prediction Markets
  • Integration with the Internet of Things
  • Decentralized storage with IPFS
  • Videogames & Gambling online
  • Automation in insurance
  • Energy market management


Conclusions

Blockchain is a recently developed technology, not yet consolidated and far from a stage of maturity. At the same time, innovation is rapid and continuous, as is the potential discovery of new real use cases. This scenario offers great opportunities for companies that will first be able to effectively apply blockchain, increasing the added value of their products and services and thus improving their business.