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.
