From payments to asset management and even data protection, DeFi solutions can already be found in many industries.
In the new decade that has just dawned, the global financial system is poised for major changes. At the forefront, decentralized finance protocols are likely to play an important role.
Decentralized finance, or DeFi, refers to blockchain-based financial software that makes it easy for anyone to assemble digital assets and smart financial contracts. You can think of DeFi as a sort of Lego system for the financial industry.
According to Defi Pulse, an analytics website that tracks the growth of this sector, the entire DeFi ecosystem reached over $600 million in value in June 2019. The value of all assets included in the DeFi ecosystem doubled to $1.2 billion by the start of 2020.
The potential of DeFi protocols
Incidents such as the 2008 global financial crisis highlight serious weaknesses in the traditional global financial system. DeFi is emerging as a practical solution that could lead the traditional financial sector into a new future.
DeFi could even extend beyond the financial sector to boost innovation and business profitability in a variety of ways. As DeFi applications expand to various sectors and industries, more and more investments are flowing into the DeFi ecosystem.
The DeFi ecosystem, which began in late 2018 with the launch of MakerDAO, is primarily dominated by protocols based on Ethereum. However, as the sector matures and becomes more liquid, greater diversity is emerging.
From decentralized credit and lending systems to prediction markets and asset management, new mainstream DeFi applications are increasingly creating buzz with the promise of greater efficiency. As DeFi solutions continue to grow while promoting financial inclusion and empowerment, here’s a look at the industries where DeFi is already thriving in 2020.
Prediction markets are created for the benefit of analysts, speculators, and traders who want to bet on future events. Their main purpose is to predict events for market participants to exploit. These predictions range from price averages to quarterly reports of a particular company to election results and even commodity prices.
One of the companies using the Ethereum blockchain for decentralization is Veil. Their system is built on Augur (Ethereum’s leading prediction market protocol) and allows anyone to create their own forecasts, write reports, and trade them.
Whether in politics, finance, sports, or global events, the prediction market based on Augur can assess the occurrence of real-time events while ensuring trustworthy communication and betting on a decentralized network.
Another company at the forefront of enabling decentralized funding in the prediction market is Gnosis. With Gnosis, anyone can create custom forecasting applications using conditional tokens that allow trading the outcome of an event.
Digital Wallets and Wealth Management
If blockchain were the Internet, digital wallets would be the equivalent of browsers. Simply put, digital wallets serve as a gateway to the Blockchain. All interactions with the Blockchain performed on digital wallets. It is a challenge to balance simplicity and security when developing digital wallets.
Managing digital wallets also requires intimate knowledge of private and public keys, as mishandling these keys can lead to irreversible losses of wallet contents. The steep learning curve that exists in this process – not to mention the technical discussion about hot and cold wallets – usually goes over most people’s heads.
For mass adoption, these aspects posed a barrier. DeFi tools can be used here to simplify asset management in digital wallets.
MetaMask is a good example of how this can be done. The company has created a platform that enables interactions with distributed networks through a simple browser. This means that a decentralized Ethereum application can be run on a browser without having to use the entire Ethereum node. Users can open a wallet in their browser in just 30 seconds without revealing any personal data.
Balance – a company that developed Ethereum’s wallet and is working to develop a simple, user-friendly interface for an open-source financial system – is also pioneering work in this sector. Argent has improved security and operation by giving users full control over their wallets. They can also choose easy-to-read wallet addresses, as opposed to the complex cryptographic texts found in most digital wallets.
Another application which comes close to a decentralized bank is Zerion. The company behind it has created a simple user interface with support for multiple wallets, with a detailed transaction list of users’ DeFi investments.
Managing a digital wallet can prove complicated for most people. Not only can a user lose their crypto funds through hacks or misplacing a private key. Simply sending cryptocurrencies to the wrong address also poses a risk of irreversible loss of crypto funds.
DeFi insurance is a secure way to provide users with a decentralized experience while resembling what traditional companies in the sector offer. DeFi insurance protocols such as Etherisc can be used to build shared risk transfer solutions.
With Etherisc, whenever certain conditions are met due to unprecedented weather disasters, flight delays or hacker attacks, a Smart Contract is executed to make immediate payouts. Nexus Mutual also employs DeFi insurance, but instead of just covering high-risk events, it insures users against smart contract failure.
By pooling the funds of multiple people in a smart contract, they can share the risks. This eliminates the need for an intermediary insurance company. In this way, DeFi also makes insurance payouts more cost-effective.
Freelance markets and payments
Freelance work and the so-called gig economy is seen by many as the future of work. Even as the number of freelancers in the modern workforce continues to grow, the issue of payment remains one of the biggest challenges.
From late payments to high third-party fees, freelancers are usually forced to move from one platform to another due to a poor payment structure. Using decentralized funding, smart contracts can be used to ensure payment for work done.
Since crypto payments are instant and global, the gig economy can use them to get rid of third-party providers, which usually charge high fees. Gitcoin is one of the companies that pioneered DeFi in the freelance and payments space, providing a marketplace for open source development. Once an open source project is completed, funds from users of the product are directed to developers who have contributed to the open source project.
Ethlance facilitates the day-to-day life of freelancers with free access and use of its autonomous platform, which connects freelancers with employers. Freelancers can also use services such as the Ink protocol to access a decentralized payment system that can be integrated into any marketplace. The platform enables peer-to-peer transactions with a reputation system that can be imported or exported for use in multiple marketplaces.
DeFi is developing promisingly
Inefficiencies currently existing in the global financial system can be elegantly solved by DeFi tools. One can use them to fight cybercrime, increase liquidity and reduce costs at the same time. Moreover, DeFi protocols are capable of providing access to high-quality financial services to all people, regardless of their status or location.
The share of Ethereum used for DeFi applicationsg is increasing, according to market analysis, even though the ETH price has decreased significantly since its last peak in June 2019. Crypto Wolf, a Twitter-based analyst, believes that the price of Ethereum will follow the growing trend of DeFi application in a parabolic curve.
However, despite the rapid growth of DeFi applications, it remains to be seen whether the blockchain itself – so far the building block for DeFi applications – will be able to meet the transactional needs of the mainstream public.