Decentralized finance, or “defi” describes a new system of global financial services being built on top public blockchains like Ethereum. Defi apps will replace many of the traditional banking functions which include services like: lending, derivatives, remittances, payments, insurance, investments, stablecoins, and marketplaces.
A new blockchain-based world-wide financial system will offer benefits including the removal of middlemen, fees, regulations, risks, and improved access to the unbanked. It will offer new types of investments, financial products, and banking services that weren’t previously possible, to anyone with a smartphone throughout the world. Traditional banking providers are likely to be replaced by apps and open sourced software that will process transactions and record them on a public blockchain.
Defi may be one of the first applications for blockchain to achieve mass adoption. It will provide millions of users across the globe with banking services that they might not be able to use otherwise due to their location, status, or income level.
Decentralized Payment Networks
One important service that ‘defi’ will offer is instantaneous, nearly fee-less, payments throughout the world. Blockchain payments can cross borders, offer reputation scores, and provide near immediate transactions without oversight. These new payment services may replace major providers like Paypal and Western Union, with a new decentralized software driven system. Decentralized payment providers include: Request Network, OmiseGo, Raiden, and Ink Protocol.
Request Network – REQ is a decentralized application with the goal of providing services similar to the likes of Paypal. Its goal is to provide cheap, secure payments throughout the world, with accurate accounting and auditing. In addition to payments, REQ will also provide invoicing, accounting, as well as services for B2B, and Iot (internet of things).
OmiseGo – OmiseGo is a subsidiary of OmiseHoldings, which is a Thai company is developing a dapp with the goal of offering a wallet, financial services, investing, an exchange, and payments through crypto or any other type of world currency.
Raiden – The Raiden Network is a second layer scaling-solution that will provide low cost, worldwide payments on the Ethereum blockchain. This protocol moves many of the transactions off-chain to speed up payments and allow for scaling.
Ink Protocol – this ERC20 protocol provides decentralized escrow and reputation services which can be integrated into any marketplace. This protocol can be used in marketplaces or even peer-to-peer.
Lending Dapps
Multiple lending protocols are currently being developed on the ETH blockchain and include: MakerDao, SALT, BlockFi, EthLend.
MakerDao – is a lending platform which allows users to borrow a stablecoin called DAI, using their ETH as collateral.
Currently this can be done through an app called InstaDapp which allows you to borrow DAI, as well as lend your DAI to generate interest. It has a well designed interface, and its functionality is already operational.
SALT – SALT was one of the first dapps on the ETH blockchain and provides fully insured loans, using your crypto as collateral.
Blockfi – this dapp allows you to earn compound interest on your crypto holdings by lending your crypto assets. It allows you to earn up to 8.6 percent interest annually.
EthLend – this is an ERC20 token allows you to borrow money without selling your crypto assets. Loans are provided for a minimum interest rate of 3% with a fee as low as 0%.
Stable Coins
Stablecoins allow customers and businesses to accept payments in cryptocurrency without having to take on the risk of the volatile crypto market.
Stablecoins include: DAI, Tether, and TrueUSD. They have different methods of achieving their price stablity. Stablecoins can be pegged to any tangible asset, cryptocurrency, or even achieve their stability through a Colleteralized Debt Position like DAI which alters the total supply of DAI to achieve the rate of $1 per DAI.
These coins offer stability in an extremely unstable market, ensuring that an investor wont have to exit when there is a high amount of volatility.
DAI – this stablecoin achieves its stability through a Colleteralized Debt Position. The total supply is altered to achieve a price that is pegged to the USD.
Tether – this stablecoin is supposedly back with a supply of USD, but there are some questions as to whether it . proper auditing of the Tether supply needs to be done to ensure this fact.
TrueUSD – This stablecoin is backed with an equal amount of USD. A user is able to redeem TrueUSD tokens for US dollars at any time.
Exchanges
Bancor – is an online liquidity exchange between various blockchain assets by providing the ability to exchange between to assets directly, with no listing fees for a token. It does this without a counterparty. It does this by holding balances of ERC20 tokens in a smart contract.
Kyber – a liquidity protocol that allows for instant token exchange. It allows users to swap their tokens without leaving their wallet. It also allows the exchange of NFTs (non-fungible tokens) and e-commerce payments.
Switcheo – a secure decentralized exchange that runs on multiple blockchains including: Ethereum, EOS, and NEO.
Marketplaces
A new type of marketplace has been built which allows users to buy and sell without having to trust each other. Blockchain marketplaces include: OpenBazar and ModulTrade. They are attempting to mitigate some of the risk by creating a system where two parties can exchange without a third-party escrow.
OpenBazar – is a decentalized marketplace which allows cryptocurrencies as the medium of exchange. It allows buyers and sellers to make exchanges without credit cards or listing fees. It runs on a peer to peer system, with no middleman.
ModulTrade – is a marketplace which allows users to buy and sell goods, get a loan, and transact in cryptocurrency.
Moving from a centralized to a decentralized financial system offers many advantages, like the removal of many inefficiencies and risks in the market. It also allows for the access of banking services to impoverished areas. It would also keep accurate records and accounting, reducing the cost in the process.