08 Jan 2020 Samantha McLauren
"DeFi" Changing The Financial Market
The mass adoption of cryptocurrencies has led to the formation of distributed ledger technology sector (DLT), which encompasses multiple industries. Prior the DLT market introduction, all financial services were running as part of the traditional financial world. However, more and more companies` attention is being caught by decentralized financial services, also known as DeFi.
In short, DeFi is a term used to describe all services running on a decentralized ledger – blockchain technology, cryptocurrencies, smart contracts, as well as dApps. During the past couple of years, DeFi was a term, primarily used for explaining the mechanism behind P2P lending platforms. TokenInsight conducted research, which shows 3% of the total ETH supply, and nearly 7% of the EOS tokens in circulation, are locked in DeFi protocols. One of those protocols is the Maker Protocol, which accounts for half of the total DeFi-locked ETH. Other protocols, especially lending and borrowing protocols, like Compound and dYdX also received mass adoption.
The financial market also saw the birth of synthetic assets, like DAI. Such assets enable users from third-world countries to store their savings into digital representations of leading global fiat currencies. Liberians, for instance, may choose to put their savings into DAI or Tether stablecoins, to avoid the 31% inflation of their domestic fiat currency.
Despite a volatile 2019, with Bitcoin doubling its price throughout the year, the DeFi market share remained relatively stable, as it was concerned with stablecoins such as USDC and DAI. Improvement of the blockchain micro space also helped the DeFi sector to receive wider recognition.
Many companies tried to raise funds for DeFi-oriented businesses, like lending platforms, crypto-backed loaning, blockchain-based banking and others. Most of the business models were a decentralized version of services, commonly found in the traditional financal world.
The most prominent use case of DeFi is in the peer-to-peer lending sector. Despite the existing way before the “DeFi revolution,” lenders can now earn passive income as a collateral in cryptocurrency. The mechanisms include the use of smart contracts, which act as a form of legal protection and communication protocol, connecting lenders and borrowers worldwide. Also, crypto lending platforms have to be compliant with strict crypto regulations, which improves security for both parties.
Decentralized exchanging (DEX) is also getting traction, as users are more and more concerned about their security. However, decentralized exchanges do not and cannot support numerous digital assets, as the vast majority of the DEXes run under Ethereum or ERC protocols. If the bottleneck of asset variety is removed, then the DEX sector is anticipated to also experience an increased adoption.
A new form of peer-to-peer financial service is emerging – this is the token leasing, which has applications in sectors with non-fungible assets, like video games. Token leasing enables users to lease in-game items or to be used for Web3 applications and as a gateway for paid services.
The traditional finance world, however, still remains skeptical about the DeFi revolution. Nevertheless, banks and other financial institutions keep an eye on the development and maturing process of modern decentralized finance. Banks like JPMorgan, for example, are already one step forward from its competitors, as the financial institution released its own decentralized digital asset. The release date for the public, however, is not yet defined.
China, on the other hand, is almost ready to become the first country in the world to release a government-issued digital coin, as the People’s Bank of China received the “thumbs up” from China’s President Xi Jinping.Ethereum Blockchain Cryptocurrency Crypto Market Tether Blockchain Development Blockchain Application crypto eth Financial service ERC20 cryptocurrencies finances Stablecoin Blockchain News DAI Defi