DeFi Explained

This wave of on looker interest was a direct result of the proliferation of products and services that offer a blockchain based alternative to the financial structures we have become so accustomed to.

These platforms include the now popular MakerDAO lending platform which grew exponentially in 2018, and throughout the course of 2019. However, MakerDAO is only a representative of one facet of the push to fully democratize the financial services industry. 

What Exactly Is DeFi As a Whole?

To put it as simply as possible, DeFi is everything we already know and are used to dealing with in the regular financial services sector. The main difference being that the DeFi movement is built and operated on the Ethereum blockchain network.

These DeFi services are mainly aimed at increasing the availability of financial services to those who are historically undeserved in this area. However, there are other facets of the financial that the innovations of DeFi are looking to shake up. These include the tokenization of traded securities, among others.

In this article, we take a look at three DeFi services/protocols that are making the biggest waves in the financial services industry. These include open lending, stable coins, and issuance/investment platforms.

Open Lending Protocols

The concept of open lending protocols has only recently come out as a forerunner of DeFi services wave, and in doing so, has gained a more than decent amount of media attention. This is in part – if not mostly- due to the explosive growth of decentralised Peer-to-Peer lending services like the aforementioned MakerDAO, Compound Finance, BlockFi, and Dharma.

These services work in much the same way as any other regular lending services. The main difference is the removal of intermediaries and the concept of “trust-minimisation” and a notable reduction in counter party risk. For this, they have the cryptographic protocols of public blockchain networks to thank.

Stable Coins

This is one facet of DeFi that has been in full view of the media, the government, and the general public for a number of years now. These are simply blockchain issued tokens that are pegged to an asset that already exists outside of the blockchain.

In most instances, these stable coins have been pegged to Fiat currencies like the US Dollar. However, there is growing trend of pegging these coin/tokens to other assets like gold.

As the situation stands today, there are three main categories that stable coins most commonly fall into. These are fiat/asset collateralized coins, cryptocurrency collateralized coins, and non-collatoralized coins.

• Fiat collateralized coins – as mentioned before – are backed up 1 to 1 with an existing physical currency/asset of the issuer choice.
• Cryptocurrency collateralized coins – as the term suggests – are collateralized in cryptocurrency, however, there tends to be an over-collatoralization in order to mitigate volatility.
• Non-collatoralized coins do not rely on fiat or cryptocurrency to maintain stability. Instead they rely on increasing and decreasing the supply based on demand. This is in many ways similar to how a central bank controls the available supply of physical cash.

Issuance/Investment Protocols

A good number of issuance/investment protocols have their sights set on the tokenization of securities, with the aim of creating a more fluid environment for securities trading. The idea is to automate compliance and to tailor make trading protocols that are compatible with the current registration.

Some of the most notable of these include tZero, Polymath, and Harbor. As the idea of “flexible securities” spreads, these issuance and investment platforms may start to see the same kind of exponential growth that the open lending protocols have enjoyed in recent times.