Exploring Open Finance #1
Answering the whys and whats around Open Finance, an introduction on the motives and what’s possible today.
Open Finance or Decentralized Finance (DeFi) is a movement to provide access to financial infrastructure (lending, borrowing, derivatives, lottery and exchange) with no censorship nor middle party custodians.
Why would DeFi matter to the average person?
- Transparency
- Permission-less Finance
Let’s take a look at the traditional finance system, How well do you know how your bank works or what happens to your money the minute it goes into the bank? There’s no easy way to check what’s being done with your money or how much the bank holds either. Additionally, in any financial system, there are regulations to be followed and paperwork that needs to be filed and any financial service has a middleman involved. Whether it’s a simple money transfer, purchase or lending there is an intermediary involved which has a fee on top of it.
But in DeFi, you are aware of where your money is all the time, what is doing at that point in time and you can even check how much assets are under management by those protocols. There’s a whole new level of transparency never before seen in the traditional finance ecosystem, here today through DeFi. There are plenty of innovative DeFi Apps that give us unparalleled access to financial services like saving, lending and borrowing, much like the traditional banks, only there’s no need to disclose sensitive information, pay extra fees or even hand over your money.
DeFi Applications are made possible with the use of Cryptocurrency. Now, Cryptocurrencies are volatile, with large intraday swings of sometimes even more than 10% in a single day and using these volatile cryptocurrencies would not work well in financial products. For example, if you take out a loan, you wouldn’t want the value of your loan to decrease right before you can use it, this would be difficult for all parties involved.
How then does DeFi work? There’s actually a type of CryptoCurrency called Stablecoins, which are designed to remain “stable” at an exchange rate close to 1 unit of traditional currency like the US Dollar. In DeFi, the most widely used Stablecoins are USDC and DAI, both of which have different mechanisms to remain “stable”.
Okay so, what can I do with this DAI or USDC?
You can think of them as programmable money, where you can actually use DAI or USDC in a wide variety of DeFi platforms that closely mimic traditional financial systems via automated smart contracts.
Let’s talk about borrowing and lending, the initial building blocks of any financial ecosystem. Imagine, you want to take out a mortgage or a loan right now, you would have to go to a bank and fill up multiple forms and wait for the banker to approve your request, this process would take up an entire day, sometimes even more as banks would need to check your credit score and appraise the value of your collateral. In DeFi, smart contracts can be automated to carry out this loan application for you, and the great thing is that you wouldn’t need to wait to find a lender, loans are instantly fulfilled via the smart contract which takes the money from the lending balances. Through DeFi, you can take out a loan at any time, anywhere, in a matter of minutes without the need to interact with a single person.
How are the loans guaranteed?
Loans must always be over-collateralized, usually set at 150% collateral. This means that to borrow $100, you would need at least $150.
Why should I care about DeFi borrowing? I won’t be taking out any loans.
You might not be interested in taking out a loan but you may be interested in being a lender also known as a supplier to these DeFi Protocols, doing something as simple as putting in some DAI/USDC into a smart contract would allow you to generate up to 10% in APR (at time of writing) with the option to withdraw at any time, with no withdrawal penalty nor with any fees on interest. This is a far cry from your bank’s savings account which offers 0.3% to 1% APR.
Conclusion
With that I would like to end Issue №1 of Exploring Open Finance. I hope it serves as a great introduction to DeFi and answered the questions you may have!
In the next article, I will be covering Opportunities in Open Finance where we explore lending, carry trading and no-loss lottery systems available today.
About Kysen Technologies
Kysen Technologies is a group focused on delivering a full stack solution from a set of application and tools built on top of a pool of blockchain networks. They have built Harvest Wallet, Cosmos Outpost and KysenPool
Kysen Wallet — Harvest
Harvest a self-custody wallet for stablecoins with an integrated lending and token swap interface supporting Open Finance initiatives.
Download it today : Apple | Android (Coming Soon)
Kysen Analytics — The Outpost
The Outpost is a macro-economic insights and analytics platform for the Cosmos Network. Starting with CosmosOutpost.io you can view summarized high level trends within the network chain to help make well-informed decisions
Kysen Validator — KysenPool.io
KysenPool runs full nodes with validation services providing a trusted entrypoint to a decentralized ecosystem. We operate blockchain nodes which provide infrastructure that help support blockchain networks.
Website: kysenpool.io
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