DeFi, or decentralized finance is an area that is rapidly growing in prominence. We briefly touched upon DeFi a few months ago, at the very beginning of this revolution. A nascent but fast-growing, exciting sub-cluster within the overall crypto universe, DeFi is a loosely collaborative effort between various decentralized and open-sourced financial primitive applications to create a transparent, interoperable and complex ecosystem of decentralized finance that can potentially supplant traditional finance. The common element that runs across all the primitive applications is that all of them are powered by Ethereum’s smart contracts and fully decentralized and transparent. Current functionalities supported by applications in the DeFi ecosystem include
-Decentralized Exchanges – such as 0x (that powers our own Fordex.co), Kyber, Uniswap, Airswap etc., offer benefits of low/no KYC, trustless, peer-to-peer non-custodial trading. We have covered DEXs at length before
-Stablecoins such as DAI, USDC, PAX, Stably, etc, but especially DAI, which is the first truly decentralized stablecoin to scale, so far. Maker has created a system, where you can mint a decentralized stablecoin (DAI) by using ETH as collateral and creating CDPs (Collateralized debt positions). The DAI infrastructure and currency has survived a wild year of turbulence for ETH prices, and is poised to grow exponentially with the soon-to-be-launched support for multiasset collateral
-P2P Crypto Lending – Compound, Celcius, ETHLend etc. Compound allows money-market borrowing and lending. Celcius allows for decentralized crypto lending
-Derivatives and Leveraged trading – dy/dx, Dharma
-Insurance – Etherisc
Although crypto-native open finance applications are still miniscule in size in comparison to their traditional finance counterparts, they are growing at a phenomenal pace and offer several important benefits as compared to centralized financial institutions. Censorship resistance offered by these applications allow users anywhere across the world to easily engage and participate without having to subject themselves to the cumbersome processes of KYC/AML checks and creditworthiness checks in the case of lending and borrowing. Plugging in your wallet with the application with just a single click is all you need to do in order to access the applications. Fundamentally, because they are crypto native, they form an important component of the Web 3 stack, fully enabling users to take advantage of the power of smart contracts and distributed apps.
One of the current setbacks of DeFi is that it supports only financial applications for cryptocurrencies (You cannot buy AAPL stock yet using DeFi). However, with the wave of tokenization of traditional financial assets looking imminent, we should expect tokenized real-life assets to soon leverage the benefits of open source decentralization.
DeFis are probably more likely than STOs to fundamentally disrupt finance
As this article puts it, 2019 could very well be the year of DeFi, just as 2017 was the year of the ICO and 2018 was the year of massive private token sales.
The below figure represents the percentage of ETH locked up in smart contracts for the top 5 decentralized applications and can be used as proxy for the growth of DeFi. Besides MakerDAO, which by far is the biggest component of the DeFi ecosystem with roughly 2m ether locked up, Compound (29k ETH locked up) is the second biggest one followed by Augur (6k ETH), Uniswap (14k ETH) and Dy/Dx (1k ETH).
“Report: Stablecoins Key to Crypto Adoption” Stablecoins will play a key role in mainstream adoption of crypto technologies, according to a report published by California-based stablecoin startup Reserve. The report, entitled “The State of Stablecoins 2019: Hype vs. Reality in the Race for Stable, Global, Digital Money” is based on information collected from 40 crypto and stablecoin firms. The of the report authors believe that developing countries with hyperinflation, such as Venezuela and Angola, will be the first to adopt stablecoins, while others will follow. Additionally, stablecoins potentially promise to be a multi-trillion dollar marketplace.
“Samsung Confirms S10 Private Key Storage Function” Samsung has confirmed that its latest flagship phone will include a dedicated secure storage function designed for cryptocurrency private keys. The Galaxy S10, formally unveiled Wednesday, includes a new function targeted toward cryptocurrency users in the form of the Samsung Knox. According to Samsung, “[the] Galaxy S10 is built with defense-grade Samsung Knox, as well as a secure storage backed by hardware, which houses your private keys for blockchain-enabled mobile services”.
“Galaxy Digital Invests in CipherTrace” Mike Novogratz’s crypto investment bank Galaxy Digital has invested in blockchain security company CipherTrace. CipherTrace has reportedly raised $15 million in venture capital in a new funding round led by major Silicon Valley venture capital firm Aspect Ventures. The round also saw investments from Neotribe Ventures and WestWave Capital. CipherTrace will use the secured funds in order to improve tools for cryptocurrency intelligence, anti-money laundering (AML) solutions, blockchain analytics and forensics and compliance.
“Bank of Lithuania Releases Official Standing on Crypto”The governing board of Bank of Lithuania has recently released an updated version of its position pertaining to digital currencies, taking into account the current market developments and evolving regulatory regimes in other jurisdictions. In an announcement published on its website, Lietuvos Bankas reveals its intentions to provide all existing and potential financial market participants (FMPs) with a “level playing field.” This includes entities organizing initial coin offerings (ICOs) and businesses providing services to Lithuanian residents who want to invest in this type of financial products.
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