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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
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      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
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      • New Zealand
  • Hi-Tech
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    • UK Fintech
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      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
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      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
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      • Financial Crisis or Not?
      • Credit Suisse Bailout
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      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
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Home Crypto Finance

How DeFi Fulfils the Functions of Finance

John Goodden by John Goodden
January 25, 2023
in Crypto Finance
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How DeFi Fulfills the Functions of Finance
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Download file | Play in new window | Duration: 5:57 | Recorded on December 27, 2022

DeFi presents an alternative business model that overcomes five critical issues affecting the current system of finance: centralized decision-making governance, restricted accessibility, operational inefficiency, lack of interoperability, and lack of transparency. This model transits legacy financial products into trustless and transparent protocols that run without intermediaries.

Decentralized finance can be an alternative to the traditional banking sector in the nine functions that usually characterize financial services.

I. Storing Value: Financial DAOs (Decentralised Autonomous Organisations) can act as banks holding custodial and non-custodial wallets. A custodial wallet service (for instance, Coinbase, Binance, Free Wallet, BitGo, Kraken ) is responsible for safeguarding a user’s funds by holding on to the private key. A non-custodial wallet (such as MetaMask, Coinomi, Exodus, MyEtherWallet, Trust Wallet) gives users who hold the private key full control and responsibility for protecting their holdings

II. Moving Value: Stable-coins are freely traded around the world, bypassing centralized organizations such as SWIFT and other interbank settlement systems. 

III. Lending Value: Pooled lending protocols such as Aave (AAVE) offer borrowers competitive deals. Aave protocols enable the creation of lending pools that allow users to lend or borrow 17 different cryptocurrencies, including ETH, BAT and MANA. Aave borrowers must post collateral before they can borrow.  Furthermore, they can only borrow up to the value of the collateral they post. Borrowers receive funds in a special token known as an aToken, which is pegged to the value of another asset.  Aave issues two types of tokens to facilitate the lending process: aTokens, issued to lenders so they can collect interest on deposits, and AAVE tokens, which are the native token of Aave. The holders are offered several advantages by the AAVE token. AAVE borrowers, for example, are not charged a fee if they take out loans derived from the AAVE token. Furthermore, borrowers who use AAVE as collateral will receive a discount. 

IV. Funding and Investing: Investment aggregators such as Yearn Finance (YFI) could ultimately disintermediate investment advisers, mutual funds, exchange-traded funds (ETFs), and roboadvisers. YFI is involved in yield farming, with users locking their crypto assets in DeFi protocols for earning interest. Yield farming follows the simple principle of ensuring more rewards for users that lock up more crypto assets in supported DeFi protocols. Another example is Rarible (RARI), a dapp allowing digital artists and creators to issue and sell custom crypto assets that represent ownership of their digital work. 

V. Exchanging Value: Decentralized exchanges (DEXes), including Uniswap (UNI) and SushiSwap (SUSHI) are competing with centralized cryptocurrency exchanges for liquidity and dollar volumes and could eventually replace today’s centralized stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq marketplace. For example, Uniswap leverages multiple crypto assets, including its native UNI cryptocurrency, to provide a service similar to that of a traditional exchange. The difference is that Uniswap has no central operator or administrator. 

VI. Insuring Value and Managing Risk: On-chain insurance policies, such as those offered by Saffron Finance, Bridge Mutual, Armor, and Nexus Mutual, could supplement or replace traditional insurance policies and over-the-counter (OTC) derivatives. 

VII. Analysing Value: On-chain data analysis such as Criptio, TokenTax, ZenLedger, DeFi Llama and DeFi Pulse provides a wealth of information on the movement, storage and status of all digital assets. CoinGecko and Coinmarketcap are the equivalents of Bloomberg in the new DeFi world. Similarly, Cointelegraph and Coindesk are the crypto equivalents of the Wall Street Times and the Financial Times.

VIII. Accounting/Auditing: Block explorers such as Etherscan and AlgoExplorer track crypto asset transactions in real time. Smart Contract auditors, such as Hacken, Slowmist, OpenZeppelin, and Consensys Diligence, could supplement or even replace the key work of the Big Four accounting firms.

IX. Authenticating identity:  Blockchain identity management systems could be used to eradicate current identity issues, such as inaccessibility, data insecurity, and fraudulent identities. Blockchain technology features the elements of maintaining data in an immutable and encrypted manner. It also offers the benefit of security through cryptography in maintaining digital identity data. As a result, blockchain technology can help in ensuring that a digital identity is secure and easily traceable.

Tags: custodial walletDAODecentralised Autonomous OrganisationDeFi financial servicesDEXeson-chain data analysison-chain insurance policiesprivate keyprotocolsstable coins
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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
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      • USA
      • Canada
    • Australasia
      • Australia
      • New Zealand
  • Hi-Tech
    • Digital Platform/IT/Software Providers
    • UK Fintech
    • Articles
      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
  • Rates
  • Economy
    • Economic Indicators
    • Articles
      • The Collapse of the Russian Rouble: An Historical Analysis and Current Implications
      • The Current State of the UK Economy
      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
    • Articles
      • Credit Insurance Legal Aspects
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
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    • UK Passes Financial Services and Markets Act 2023
    • Latest about the UK Regulatory Proposal for Crypto Assets
    • How will MiCA (Markets in Crypto Assets) Regulation Affect Trade Finance and the Banking System?
    • Markets in Crypto Act (MiCA) Becomes EU Law
    • An Introduction to EU’s Markets in Crypto-Assets (MiCA) Law 
    • Supply Chains and Blockchain Technology
    • The DeFi Revolution
    • How DeFi Fulfils the Functions of Finance
    • Taxonomy of Crypto Assets
    • Crypto Currencies
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    • Interview with Tradeshift
    • Interview with Kyriba
    • Interview with Orbian
    • Interview with Crossflow
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