Decentralized Finance commonly referred to as Defi is increasingly hitting the headlines in the crypto space. The enormous growth of Defi applications, as evidenced by the Nasdaq adoption, is set to disrupt the world’s traditional financial institution in the coming years.
The inevitable need for an open, secure and most importantly, secure financial systems is the main reason behind the increased usability of Defi platforms. Defi leverages blockchain technology providing users with data privacy without government and regulatory control.
The following extract will delve into the current trends of applications in the Defi sector looking at the issuance platforms, crypto lending platforms as well as other applications involved in the Defi sector.
What is Decentralized Finance (Defi)?
Decentralized Finance (Defi) is the movement that leverages decentralized networks to transform old financial products into trustless and transparent protocols which run without intermediaries.
Defi applications are focussed on building financial products and services using blockchain to revolutionize the financial sector by functioning as an alternative to centrally-governed institutions, including banks and other financial systems.
Defi makes good use of blockchain tools to provide users with control over their finances. It has emerged as an effective replacement to the current traditional financial systems attributed to the fact that it provides extra functionality as well as reduces operational risks.
Defi started gaining prominence in the crypto space in 2018 following a boom in Ethereum-based projects focused on building an independent, secure, and open financial system. Among the earliest supporters of the Defi movement included Paradigm, MakerDAO and Origin Protocol.
How Does Defi Leverage the Blockchain?
As mentioned before, Defi employs blockchain in storing, managing and minting crypto assets. Blockchain stores digital information within an immutable trusted and distributed networks without the presence of a third party. The use of blockchain in Defi allows users to access a myriad of financial services including cross-border transfers, payment, investing, borrowing, lending and asset management without the involvement of a central authority. Smart Contracts on the Defi applications enhances the resiliency and transparency of the entire financial system.
Growth of Defi
Since the launch, the Defi has been on an uptrend following the surge of Defi protocols. The value of Defi’s applications has significantly grown in two years since its emergence. According to DAppTotal, DeFi’s applications worth over USD1.22 billion as of Sep 12, a 2019-an improvement from USD180 million a year ago. The total ETH and EOS locked in DApp circulations are 3.11% and 10.02% respectively. From the figures, it’s evident that Defi apps have grown enormously pointing at a bright future of Defi development.
Current Trends in Defi Applications
There are numerous Defi applications, each serving a particular function in the financial systems. Out of the many applications, the most fast-rising application is borrowing and lending. Defi’s peer-to-peer and trustless lending platform allows users to get a loan within a short time. Users are also provided with the opportunity of accessing an extensive pool of lenders and obtain a favourable loan without much struggle. Similarly, lenders have greater control over their debtors. Below are some of the current trends in Defi applications
1. Open Lending Protocols
Open lending protocols is currently a growing Defi application on the Ethereum ecosystem. Decentralized lending has achieved considerable attention in the crypto space attributed to the increased use of Dai and other P2P protocols like Dharma and liquidity pool designs such as Compound Finance.
Open decentralized lending comes with numerous advantages that solve the problem experienced in the traditional financial systems. Among the open lending protocol advantages include collateralization of digital assets, standardization and interoperability, prompt transaction settlement, elimination of credit checks and integration with digital asset lending/borrowing.
An open lending protocol such as the MakerDAO is built on the Ethereum blockchain and is well-positioned to expand financial systems across the globe. Other lendings that leverage open lending protocol include BlockFi, which enables users to send and borrow digital assets using common credit models such as credit checks.
2. Issuance Platforms and Investing
Issuance platforms involve a broad range of platforms including several exchanges which also serves as a double issuance medium, e.g. tZERO. Issuance platforms and investing has started gathering momentum in the crypto space. Security token platforms such as Harbor and Polymath provide the frameworks, tools and resources for issuers to launch tokenized securities on a blockchain. Token issuance platforms prepare their own standardized token contracts for securities that enable automated compliance and customizable trade parameters to meet regulatory requirements.
3. Decentralized Prediction Markets
Decentralized prediction markets have also emerged as one of the most captivating components of the open financial system. Prediction markets play a vital role in hedging risk and speculating on world events.
Similarly, decentralized prediction markets play a similar role but are more focused on cryptocurrencies but cannot censor the markets. One example of a decentralized is Augur– a decentralized censorship-resistant prediction market based on Ethereum. Augur has extensive usability from political and weather forecasting to hedging several types of financial risks.
4. Exchanges and Open Marketplaces
Exchanges in the form of decentralized exchange (DEX) protocols and P2P marketplaces have grown considerably in the cryptocurrency industry. DEXs and P2P exchanges facilitate the exchange of assets on Ethereum platform between two parties without the need for an intermediary.
DEXs also provides a way of swapping tokens as well as other non-custodial means for exchanging one asset for another with a short time and a lower risk. Examples of exchanges and open marketplaces on the Ethereum ecosystem include IDEX-a decentralized exchange and EtherDelta
Defi comes with lots of benefits that make it ideal for the financial industry. The platform is providing the unbanked population with a means of accessing financial services including loans, payments, savings, mortgages and insurance services.
Defi is a transparent and more resilient financial system capable of providing an efficient, cheap and convenient financial service with high interoperability. There are numerous applications of Defi in the open finance ecosystem, including infrastructure platforms, insurance, custodians and payment avenues. Defi is set to grow even more into the future attributed to increasing accessibility that fosters its development.