The Future of Finance — Is It Decentralized?
By: Audrey Nesbitt
Tags: Blockchain, Defi, Future, Finance, Bitcoin

Even with its great interest, there is a majority of the public that still doesn’t understand how it works.

DeFi — A Contrast to the Current Financial System

In a traditional finance setup (called CeFi by enthusiasts, or Centralized Finance), the whole monetary control is in the hands of a few people or organizations. This includes the policy making, issuance of currency, determining rates of interest and even controlling inflation. On one hand, this may seem good. A few people who have the expertise can decide what actions to take that are in the best interest of the public. However, with that comes several flaws.

For instance, there are many steps that can be taken to kick start a dying economy, but a small group of people behind closed doors may prefer to take the fastest route. This can lead to decision makers taking steps that could potentially erase the wealth of millions of people in a nation. Such is the case of Venezuela, where a few poor policy choices led to inflation of over 10 million percent. The inflation was so high that many people witnessed their hard earned savings becoming worthless in the span of a few days.

These kind of steps and poor decisions is what led to Satoshi Nakamoto creating Bitcoin in the first place. Trustless, independent and without a central control, cryptocurrencies are hailed as the future. Unfortunately for proponents of cryptos, most of the financial systems that grew around cryptocurrencies are, ironically, centralized.

The DeFi Solution

Using the power of blockchain, DeFi systems offer a far better option for people to invest and make profits. A digital currency, a protocol consisting of digitally coded smart contracts, and a user interface typically a dApp) rounds off a DeFi ecosystem.

The main value proposition of DeFi is that everyone retains full control of his or her assets. Fiat, or traditional money, is never in the hands of the owner. Either it’s the bank that holds it or a financial institution such as forex exchanges. In DeFi, no one holds your assets but yourself. Today, there are several DeFi platforms that offer investment and other opportunities for people in the same way legacy systems do.

The Fathers of DeFi: MakerDAO and Compound

Although many would argue on what is the first DeFi system, MakerDAO and Compound are no doubt the first platforms which made DeFi truly accessible to the public. Both platforms offer one of the most basics of decentralized finance. People can deposit their funds in pools and these funds are lent out to borrowers. The interest earned from the borrowers is distributed to the pool members. Since all of the controlling is done through direct voting of members and the agreements coded in smart contracts, there’s no need of intermediaries such as banks and guarantees.

This means that what should have been a commission for the bankers is passed on to the lenders directly, giving them higher interest on investments. On the other side of the contract, the borrowers are offered a lot lower interest than what they would get from banks. A win-win situation for all.

Decentralized Exchanges

DeFi services have further expanded to include more complex investment and earning services, such as whole crypto exchanges built around it. The speed, efficiency and economics of blockchain are integrated into the roots of these exchanges. They are disguised by the nomenclature: Decentralized Exchange (DEX).

The users connect their wallets directly, trade in using built in smart contracts of the exchanges and their target cryptos are deposited directly into their wallets. There’s no involvement of the exchange apart from the contract execution. Some exchange don’t even require signing up, giving true economical and privacy freedom, the essence of blockchain.

Let’s look at a few of the more popular DEXs:

Binance DEX: Binance, one of the largest centralized crypto exchanges in the world, offers an independent DEX. It has its own native blockchain that offers one of the fastest DEX trading speeds with low trading fees.

Uniswap: The most influential of all DEXs, Uniswap is the largest in terms of trading volume ($220 million daily transacted amount). Uniswap is also the first DEX to let go of the traditional order book method and all trades are done through its liquidity pools. This means that users’ orders are executed in real time, as the tokens needed to be bought are always available. Thus, there’s no need to wait for a matching order.

Bisq: One of very few DEXs that offer Bitcoin, Bisq is decentralized to its core. Tor routing and local computing means that every aspect of the exchange is decentralized and privacy is maintained to the maximum. However, this makes the exchange considerably slower in operations.

Kyber Network: Delving into the deepest of DeFi ecosystem, Kyber Network is not an exchange in the traditional sense (even for DeFi and DEXs). Kyber is a set of protocols and smart contracts that can be deployed on top of any blockchain, much like a secondary layer. This reverse approach allows for building a DEX by anyone, as long as the blockchain in question has smart contract capability.

Other DeFi Uses

DeFi has expanded, much beyond the simple trading and lending scenario. Today, there are DeFi platforms that offer different services that cover other financial aspects including services like:

Payment Protocols: PumaPay, xDai Chain and Raiden are good examples, where people can pay for day to day services to merchants who accept crypto payments.

Identification and KYC: Platforms life Civic, SelfKey and Bloom verify personal identification documents under KYC and AML regulations. Users then don’t need to verify on partner platforms every time they create a login.

Insurance: Take the middleman out of you insurance with Nexus Mutual, Ehterisc, and VouchForMe.

Investments: Invest in a number of products through Melonport, Swarm, Brickblox and Slice.

Stablecoins: Avoid the volatility of cryptos and add the security of blockchain with stablecoins like Dai, TUSD, GUSD and Carbon.

NFTS: Non-fungible tokens are cryptographic tokens representing a unique asset whose main feature is digital scarcity that cannot be interchanged. DeFi Companies like Gene Finance are building platforms to increase liquidity opportunities for NFTs in the virtual economy by introducing mining pools to stake idle NFTS and a decentralized marketplace for seamless trading.