DeFi is changing the financial market model; EQD.Market is Bringing in a Quiet Transformation
Tags: Tokenized Securities, Cryptocurrency, Defi, Blockchain

DeFi has become the hottest buzzword in the realm of cryptocurrencies, fintech and blockchain. DeFi, or Decentralized Finance, is the term given to the entire gamut of applications, smart contracts, protocols and digital assets that offer an open alternative to conventional financial services like insurance, trading, loans, savings accounts, etc.

What is DeFi and how does it work?

Traditional finance is centralized. It is driven by central banks or institutions that issue a fiat currency which is what drives the global economy and allows trades between two entities. The entire economic power thus resides with central authorities that regulate the flow of this centralized money.

These financial institutions — banks that operate under the ambit of a central bank — offer securities products to investors and lenders, taking their money and giving it to borrowers. Borrowers pay interest to the financial institutions and investors get returns on their money via the market. Financial institutions help mobilize funds, offer access to capital, provide financial data, offer a secure place to store money and facilitate savings, and also allocate such savings to productive ventures.

But there is always a danger associated with such an authoritarian and centralized financial system. The money of depositors is at the mercy of financial institutions.

DeFi encompasses all of these functions, but without any central authority. It is possible to borrow funds, get loans, deposit funds, save money, trade financial products without having an account with any financial institution, without any paperwork, and without any permission or approval, and just with smart contracts on decentralized blockchains — the ease, accuracy, and speed is obviously a huge advantage.

To make it simpler, imagine what happens when you swipe your card for any purchase — you, the buyer, pays the business, the seller, via a financial institution that has the power to control this transaction and also records it in its ledger. Or when you transfer some money to someone, that transaction you do with your own money is monitored and approved by a financial intermediary.

With DeFi, this financial institution is removed from the transaction, and you have complete control over your money. DeFi goes way beyond just money- the ecosystem now encompasses all kinds of financial tools and assets.

The entire alternate financial system makes use of dApps or decentralized apps, built on Ethereum, and there is no central authority or intermediaries like the traditional financial market model. Without any human intervention or a centralized system, the system is trustless, permissionless, faster, more accurate, and allows users to have more control of their money.

Complete elimination of middlemen is one of the biggest advantages of DeFi which not only makes direct purchases simpler and faster, but also powers transactions like crowdfunding, loans, betting, derivatives and insurance.

The various DeFi products are collectively referred to as open finance since it’s an ecosystem where blockchains, digital assets, open protocols are integrated with conventional financial structures.

Open lending protocols

Open Lending Protocols are digital money lending platforms built on the blockchain. Similar to a bank, when a user borrows the digital assets that another user has deposited, the depositor earns interest. But instead of the intermediary — the bank — “smart contracts” dictate terms of the loan — rates of interest, distribution of interest and connecting the borrowers to the depositors. The lender earns a higher rate of interest because there are no intermediaries, and hence no commissions.

Compound, Uniswap, MakerDAO, Dharma and BlockFi are among the most popular open protocols in the market.

Disrupting various fintech verticals and applications, DeFi is attracting enormous capital investment, and is fast becoming the favorite ground of entrepreneurs and investors alike. Traditional financial markets, like the stock exchange, may soon have to give way to DeFi as it continues to offer more services, platforms and applications.

As of now, the total value of assets locked in DeFi is more than$13 billion, and is only going to grow more in the future.

How do open finance protocol platforms work

Decentralized lending is as simple as taking bills out of your wallet and handing them to the borrower — all you need is a few clicks of the computer mouse or your smartphone.

Uniswap allows users to trustlessly swap ERC20 tokens. Instead of using the traditional order book model, Uniswap pools tokens into smart contracts and users trade against these liquidity pools. Anyone can swap tokens, add tokens to a pool to earn fees, or list a token on Uniswap. The two different type of contracts that comprise Uniswap are Exchange Contracts and Factory contracts. The first type hold a pool of a particular token and Ether can be swapped against. The second type of contract creates new Exchange contracts and registers ERC20 token address to Exchange contract address. No listing fee is needed to add a token on this platform and anyone can register a new token by calling a function on the factory token.

The token as well as Ether pools are empty at the first instance of creation of Exchange contract for a token. The first person to deposit into the contract determines the token to Ether ratio. An arbitrage opportunity is created when a ratio that is different from the current market ratio is deposited. When adding to a pool that is established, liquidity providers need to add a proportional amount of Ether and token to the pool, or else the added liquidity is also at risk of being arbitraged. Users find large liquidity pools beneficial as they are able to go for larger swaps without disturbing the token to ETH ration much. Lastly, in proportion to the liquidity contributed by a provider, liquidity tokens are minted to their address. The user can later take the liquidity as well as fees accumulated during the liquidity locking period, and the tokens are then burned.

Compound is an Ethereum based algorithmic money market protocol that allows users to deposit crypto assets and earn money, like a traditional savings account in a bank. Borrowers also borrow crypto from this protocol by offering collateral. With openly accessible Ethereum based smart contracts, Compound allows interest rates to be determined by the demand and supply of crypto assets. Lenders can withdraw their locked assets at any time, and borrowers can pay the loans back any time too. Compound has its native ETRC20 token, the cToken, which allows lenders to earn interest as well as use, transfer or trade that money in other dApps.

EQD — The one-stop solution for integrating corporate stocks to DeFi liquidity pool

Now, just imagine all of these exciting features being applied to real-world financial assets. Like a company’s shares. What would that be like? After tokenization of a company’s shares, they could be placed on a DeFi platform and be made available to a large pool of investors in a market that incentivizes liquidity providers.

EQD.market is an equity digitization service that offers instant corporate stock tokenization software and digital equity public ledger that instantly connects any company’s corporate shares to DeFi liquidity pools and helps expose the business to a large pool of investors.

With DeFi, anyone has access to any number of financial products and services, from simple savings to complex trading, and with practically no infrastructure. With intermediaries removed from transactions, some products are potentially cheaper also, and that is a major differentiator as it makes way for designing newer products that will be useful for anyone. In principle, the transparency, the ease and the democracy in the DeFi space mark the changes in the financial markets.

With EQD.market, any traditional business can leverage the almost limitless potential of DeFi through equity tokenization and gain access to investors it would otherwise have not. We all know the hurdles corporate stock trading has and geographical boundaries is one of the major. With digitized stocks on a DeFi platform, investors from across the globe can participate thereby enhancing the value for the company whose shares have been tokenized.

Parting thoughts

DeFi has opened up novel vistas for not only alternative financial systems but also offers an attractive opportunity for traditional finance. As is evident, the majority of the market liquidity is going into the DeFi ecosystem. Everyone is buying and selling via DeFi swap platforms through peer-to-peer transactions, without intermediaries and any purchase risk on low-cost blockchain swap protocols like Uniswap which are gradually taking over the market.

Even with the volatility of cryptocurrencies and possible bugs in smart contracts, DeFi is gaining popularity with investors, lenders, entrepreneurs and borrowers because of all the obvious benefits, and looks all set to replace traditional financial markets in the future.

Investing, loaning, borrowing funds with DeFi services that are freely available and complete control over the cryptocurrency wallet is just the beginning of how DeFi is changing the financial market landscape. Tokenization of financial products and assets is on the rise, and tokens are smart contracts that can be created with the same characteristics as financial products.

A fully compliant system, EQD.market allows new and medium-sized companies and new venture opportunities a one-step market exposure facility via connecting to the DeFi investment protocols. Using the advanced software protocol, companies can digitalize their equity digitalization and tokenize shares.

Once a company tokenizes its shares in a compliant manner through EQD.MARKET, the second step would be the listing in the United Ledger of Tokenized Equity (LTE) (equityconnnected.io) where tokenized shares connected to the DeFi swap protocols are listed. On this platform, a large pool of investors is incentivized to create a liquidity pool. This creates a win-win scenario for both the companies as well as investors — the company gets liquidity for its tokenized shares and investors get the opportunity to invest in safe and promising investment vehicle.

For more information on what EQD is offering, please visit us at https://eqd.market