What is DeFi, and how does the CUDOS network fit in?

Decentralised Finance (or DeFi) is one of the hottest areas in the cryptoverse at the moment.

DeFi (AKA Open Finance) refers to financial services using digital assets and smart contracts, protocols, and decentralized applications (DApps); usually built on Ethereum. Smart contracts are essential to DeFi as they enable us to trade anything of value digitally without the use of intermediaries, such as banks or lawyers. Instead of these middle men, DeFi uses automatic enforceable smart contracts to enable financial services to be built on the blockchain very much like piecing together lego; stacking DApps together to optimise your solution and your returns.

DeFi presents the possibility of reframing any existing financial service into a decentralized version, transforming them into transparent and trustless protocols. There are many exciting projects under development right now covering such diverse areas as no-loss savings games, prediction markets, and decentralised exchanges, as well as more familiar services such as borrowing money, lending for interest, and insurance.

DeFi services typically exhibit 3 significant characteristics:

• They’re permissionless, meaning that anyone anywhere can access them, and they’re globally available from day one
• They’re trustless, in that both parties in a contract do not need to trust each other’s reputation, as the smart contract itself assures the agreed outcomes
• And they’re transparent, as anyone can inspect the code on the blockchain, and all transaction activity is also public for anyone to view.

DeFi also expands on the core vision of cryptocurrency. If cryptocurrency promises to make money and payments universally accessible to anyone — wherever they are in the world — then DeFi adds to this by making the entire range of financial services available without borders too. So where some 1.7 billion people across the globe currently remain unbanked (not having access to a bank account) that may soon change thanks to DeFi. As long as they have a mobile phone and an internet connection (and two thirds of them do), DeFi financial services of all kinds could soon become available to those less fortunate, without some of the constraints that would currently prevent them accessing these services, such as KYC and other regulations.

Why is DeFi causing a buzz?

Given that the current world of financial services is both mature and highly competitive, why is DeFi causing such a stir, and why the surge of interest in 2020?

One reason is that there’s a regulation vacuum in the DeFi DApp space. Not only are regulators behind the curve to create and implement the policy for this new type of finance, but they are also hesitant to regulate too quickly which could stifle innovation and new value creation.

DeFi is also seeing growth as mainstream players join the fray, eager to innovate to reap potential efficiencies and business model improvements, and not be left behind or displaced. At time of writing some 75 of the world’s major banks are trialing blockchain.

Challenges Ahead

While all of this sounds like an unambiguously desirable aspiration, there are certainly hurdles to jump, not least the current disparity between processing cost overheads between traditional centralised financial services and emergent DeFi.

And while DeFi aims for decentralisation, that doesn’t mean that every part of a DApp is decentralised. This is because every DApp has a vendor company that is building and maintaining the smart contracts that DeFi services are based on. So it might be more apt to focus on the non-custodial dimension instead. While there may be a central company providing the DApp on which the financial service is distributed and delivered, there is no central agency that holds the asset (e.g. there is no central bank holding your money). With non-custodial finance you still hold the keys to your crypto, instead of entrusting them to a middle man, such as a banker.

What’s Next?

Despite it being very early days for DeFi, there are already some very promising projects to address the processing cost problem, and other technical barriers to mainstream blockchain adoption.

The Chainlink network makes it possible for DApps to grab data and information reliably and securely from non-blockchain sources, with reliable tamper-proof inputs and outputs for complex smart contracts on any blockchain.

Algorand provides a consensus mechanism that is permissionless with pure proof of stake, ensuring full participation, protection, and speed within a truly decentralized network. This means that blocks can be finalized in seconds, and transaction throughput is on par with large payment and financial networks.

To facilitate all of the above, CUDOS makes it possible to use computing power reliably and securely either directly from the decentralised layer 2 network itself, or from the highly cost-effective and scalable Cudo off-chain network (layer 3) for any workload requiring a higher level resource intensity. CUDOS is a layer 2 oracle network, governed by smart contracts, connecting blockchain developers and services including DeFi, to a global footprint of computing power on the Cudo platform. Cudo is a distributed computing platform already providing customers around the World with up to 10x more cost-effective computing.

It certainly will be interesting to see how this emergent technology area of decentralised finance plays out, as innovative startups seek to displace traditional models with new, more democratised versions of familiar financial services, find new underserved markets quicker, and even make new financial service models possible.