Decentralized Finance: The New Frontier Part 1
>> This article is for informational purposes only and is not financial advice. The information does not constitute investment advice or an offer to invest.
Of all the possibilities which have been created by developments in blockchain, decentralized or open finance is perhaps one of the most exciting. Decentralized finance (DeFi) has been growing expeditiously recently, due to fear of a funding gap, lack of banking transparency and other frightening realities that many face across the world.
By using decentralized financial systems, users will be able to have a new sense of control over their data and finances, having to meet only one simple requirement: having an internet connection. It’s no surprise that these open systems are becoming popular in an age where individuals are increasingly concerned about their online identities and data as well as the transparency of financial institutions.
This is what the world can expect from decentralized finance, a new frontier for the financial industry:
Centralized Finance — Right Now
Economies the world over are heavily dependent on the stability of their financial systems, but these systems are often affected by troubling issues such as providing poor investment advice, having dodgy lending practices, charging needless fees, fraud and even forgery- not exactly words that inspire trust and confidence! This doesn’t even include the fact that bank access and reliability is a luxury, susceptible to counterparty risk and local crises.
Nearly as concerning as unequal access is the lack of user ownership in most centralized financial systems. Banking fraud around the globe is increasing, with nefarious individuals breaching bank systems to gain access to user information and funds. Financial regulations are also a challenge, as the regulatory environment will differ greatly from one country to the next, making interoperability and coordination a serious challenge.
According to Cima Global, the current role of national governments in banking means the future is likely to be a hybrid of a regulated free market approach and so-called state capitalism. But what if it could be decentralized instead?
Decentralized Finance: The Future
Centralized financial systems can levy arbitrary censorship or refusal of service based on internal or regulatory pressures. Decentralized systems, on the other hand, will offer the benefit of not being manipulated by any one authority, and be an immutable record with lower cost and little barrier to entry. This could be a huge benefit to the underbanked who are facing challenges like high fees and inefficient systems — after all, even in developing economies, smartphones have the required internet connection necessary to participate.
These decentralized systems have also introduced the possibility of digital asset loans routed through open decentralized lending protocols such as Compound, Dharma, dYdX and MakerDAO (more on these in part 2). The total value of these types of loans increased by a staggering 1200% between 2017 and 2018.
Decentralized Lending — Show Me The Money
Decentralized lending is among the most promising innovations in the decentralized finance industry. By using programmable monetary policies, loans can be granted near-instantaneously on public blockchains. Using blockchain technology, it is possible to match borrowers with lenders, pledge collateral, confirm collateral ownership and manage transactions and risk, quickly and without counterparty risk
These open policies have created the possibility of standardization and interoperability, something big banking has not been unable to achieve so far.
Right now, borrowers of digital assets are mostly trading desks, hedge funds and active traders working on shorter timelines, but should include the general public soon.
Bloqboard: Decentralized Lending and How it Works
Take Bloqboard as a first example. Bloqboard is a unique digital asset lending platform that provides users with the ability to borrow and lend digital assets, and have their transactions settled on the Ethereum blockchain.
Borrowers can request a loan either peer-to-peer or from a liquidity pool- they then commit to a predefined interest rate and loan duration which executes via smart contracts. Apart from these prospects, Bloqboard is expanding to allow lenders to add loan offers, allowing borrowers to instantly get a term loan using their wallet.
The CEO and co-founder of Bloqboard, Vitaly Bahachuk, stated that: ”Open finance augments traditional banking systems and allows for the creation of new types of financial instruments, such as synthetic assets. In addition, many traditional financials assets will be originated or have representation on blockchains. This should increase operating efficiencies related to trading, transfer, settlements, reporting and custody of such instruments. Once these markets mature, they will concentrate significant liquidity.”
Stay tuned for Part 2 of this series and join in the discussion below with your comments.
About the Author: Kirill Bensonoff is a serial entrepreneur with multiple exits, blockchain investor and advisor. He’s also the host of the Boston DLT Meetup, founder of the Boston Blockchain Angels, producer and host of The Exchange with KB podcast and leads the Blockchain + AI Rising Angel.co syndicate. Learn more by visiting www.kirillbensonoff.com and follow him on Twitter @prankstr25.
Disclaimer: Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. This article is for informational purposes only, and is not financial advice. The information does not constitute investment advice or an offer to invest.
