An Overview of Decentralized Finance

The Road to DeFi

Global wealth is increasing, but so is the gap between the rich and the poor. According to the 2018 Global Wealth Report published by the Credit Suisse Research Institute, global wealth currently stands at $317 trillion dollars. However, according to Credit Suisse’s 2018 Global Wealth Databook, income inequality is a problem, with the world’s richest 1 percent owning 45 percent of global wealth.

According to some experts, one of the leading causes of global wealth inequality is lack of access to formal financial services. Around 1.7 billion adults worldwide still do not have a bank account and lack access to formal savings and credit services. The good news though is that we’ve made strides in increasing access to financial services. This is most notable in developing economies that saw an increase in financial inclusion from 62 percent to 69 percent.

In the Philippines, for example, fintech startup Ayannah offers digital remittances, payments and business services through its platforms Sendah, Sendah Direct, and Sendah Remit. Ayannah offers peer-to-peer transactions through online and mobile platforms, enabling more Filipinos with a mobile device and internet access to access previously unavailable digital financial services. Similar digital financial services also exist in other developing economies. In Africa, mobile payments for bills and everyday services are taking off, even though many people there lack bank accounts.

According to ChainRift Research, 2 percent of Kenya’s households have been lifted out of poverty since the proliferation of M-Pesa. M-Pesa is a fintech initiative that first sought to digitize parts of microfinancing services, including distribution and payments. Over time, it expanded into a remittance service that allowed more people to transact faster and at more affordable rates.

In India, fintech platforms have helped increase financial inclusion as well. Fintech platforms like the ones offered by Mobikwik, an Indian company providing digital payments and wallet services, have provided financial services to more unbanked and underserved households.

On the surface, full financial inclusion still appears hard to attain. However, with the technological innovations we are witnessing, the future might still be positive for those at the bottom of the pyramid. We can harness these innovations to narrow the overwhelming gap in our global financial system.

People coming from low-income communities find it very difficult to access formal banking services. These services include savings accounts, investment services, loans, and financial literacy programs. According to a study from the Wharton School, this is one of the many traps that keep the underbanked and unbanked locked in a vicious cycle of poverty. The proposition is simple: improve financial literacy and improve access to basic banking services. People must be able to control their financial fates.

Blockchain, Decentralized Finance & Financial Inclusion

Blockchain and cryptocurrencies have been heralded as a potential solution to increase financial inclusion. After all, cryptocurrencies are secure, can freely cross borders, and can be held by anyone with basic internet access. Blockchains supporting these cryptocurrencies can be built so that no central authority or government can control it or use their power to deny access to certain people. The question is, can crypto realistically solve the problems of unbanked and underbanked people?

Proponents believe that cryptocurrencies enable decentralized finance, or DeFi. DeFi is an alternative to the traditional financial system controlled and regulated by governments, financial institutions, and regulators.

A prevalent attitude with current traditional financial institutions is that it is not cost-efficient to provide services to low-income citizens. For example, many banks don’t like to maintain accounts for low-income individuals since they can’t maintain sizable deposits. This is one reason why many banks require minimum account balances, which in turn, discourage many lower income individuals from opening bank accounts.

Another issue is that financial institutions often require government-issued identification before opening accounts. Many poor people, refugees, and other disenfranchised people don’t have these documents and have no way of obtaining them. This becomes another barrier to financial inclusion.

Until now, there was no real alternative to this centralized financial system. Financial inclusion was only a dream for most of the world. This status quo is one which the blockchain seeks to disrupt.

Blockchain overcomes these issues by making it easier for everyone to access secure, reliable, borderless, affordable, and fast digital financial services previously unavailable to them.

Blockchain’s primary aim is to enable a system that does not need any centralized party to govern financial transactions. This means lower barriers to entry, a system not governed by any particular individual, entity, or government authority, and a network that maintains safety, security and reliability of transactions.

What makes Decentralized Finance (DeFi) unique?

DeFi services can be accessed by everybody. Anyone with internet access and a connected device can join the digital financial system. There is no authority to prevent and filter those who wish to access the network. Similarly, anyone can deploy financial service applications on blockchains without explicit permission from regulators. The creators of Bitcoin didn’t ask for permission from anyone.

DeFi is decentralized. DeFi services work without third parties having to approve transactions. Blockchain also enables users to engage in Peer-to-Peer (P2P) transactions. This creates a cheap and fast 24/7 transaction network.

DeFi systems are secure – The blockchain offers a decentralized ledger that records every transaction made in the network, with records are spread across all its members. Also, its decentralized nature allows the application to have no single point of failure, differentiating it from the traditional financial system. These properties  make way for a robust, trustless, immutable, and transparent system that does not need another party to validate all transactions made.

DeFi services are resistant to outside control. Blockchains can be built so that individuals and entities cannot control it. Public-private key cryptography can ensure that individuals can securely transact with each other without worrying about being monitored, restricted or having their access revoked. User funds can be secured in crypto wallets without relying on banks and government institutions. This way, funds cannot be confiscated or seized. This is especially important in countries characterized by oppression and censorship.

DeFi services are built for trust. Smart contracts deployed on blockchains can make financial applications more transparent, immutable, and streamlined. Participants are reassured that the code behind smart contracts are open to the public for tested. Most DeFi services are open source and available for developers to build on and improve.

DeFi Services Available Today

In addition to creating innovative new financial services that didn’t exist in the past, DeFi improves upon the services that traditional financial systems currently provide. DeFi services available today include lending, exchanges, stablecoins, derivatives, bundling, payments, tokenization, and funding, among others.

We will briefly the leading players in these areas. Since the DeFi landscape is rapidly evolving, we can be sure to see new players enter the market while existing ones leave.

Lending

Photo by Dmitry Demidko on Unsplash

Decentralized lending is a crypto-loan service built on the blockchain. Decentralized lending aims to provide seamless and cost-efficient credit access to people, whether they are participating in the traditional financial system or not.

Compound

Compound offers a decentralized, secure, liquid, and accessible alternative money market using cryptocurrencies. With Compound, individuals can earn interest from their crypto deposits, or borrow crypto without having to interact with counterparties. This eliminates intermediaries, reduces fees, and increases access to credit by allowing individuals and smaller companies to participate.

Check out BitPR’s feature on Compound here.

Dharma

Dharma is an open source platform built on Ethereum that allows users to access global lending products through tokenized debt issuance. The protocol uses smart contracts to perform functions related to debt issuance and repayment. Dharma’s aim is to move debt assets onto the blockchain since global debt assets are estimated at an astounding $243 trillion.

Check out BitPR’s feature on Dharma here.

ETHlend

ETHlend is a decentralized Ethereum application aiming to offer secure peer-to-peer loans for ERC20 tokens. Borrowers can create loan requests and have lenders decide how they can meet their terms. Users do not have to find their own intermediary to settle transactions.

Lendroid

Lendroid is an open Ethereum protocol that handles the lifecycle management of collateralized digital asset loans. Borrowers can take out loans in ETH or ERC20 tokens by putting up other ERC20 tokens as collateral. Holders of its native token, the Lendroid Support Token (LST), are considered “market creators” that determine the parameters for Lendroid’s loan market, such as setting loan terms.

BlockFi

BlockFi is a decentralized lending platform that offers USD loans to crypto holders. So far, these loans can be collateralized through BTC or ETH. BlockFi aims to provide liquidity for crypto assets, transaction transparency, and greater efficiency in settlement of crypto lending transactions.

MakerDAO

MakerDAO is a Decentralized Autonomous Organization (DAO) that manages its stablecoin, DAI, which is pegged to the US Dollar. Maker has two different tokens: Maker (MKR), a governance token, and DAI. With MakerDAO, anyone can collateralize their ETH to obtain DAI loans. Smart contracts lock ETH as collateral, returning them when the DAI loan is repaid.

Check out BitPR’s feature on MakerDAO here.

Bloqboard

Bloqboard is a crypto-lending platform that allows peer-to-peer borrowing or lending using smart contracts. Over $150,000 in loans have been processed through Bloqboard, where users can create and manage loans on the Ethereum blockchain. Loan requests are made to borrow ERC20 tokens, and these loans are managed through the Dharma Protocol.

Decentralized Exchanges

Image by Csaba Nagy from Pixabay

 

Decentralized exchanges, or DEX, are exchange platforms for cryptocurrencies that function without a central governing body or middlemen. Using smart contracts, DEX facilitate crypto trading by minimizing friction and cost.

0x

0x is a DEX protocol built on Ethereum. It uses smart contracts to create a standardized protocol for blockchain transactions. 0x was designed to address issues with other DEX such as transaction speed, liquidity, and interoperability. Its token ZRX is used to pay trading fees and is also used to vote on governance matters and protocol improvements.

Check out BitPR’s feature on 0x here.

Bancor

Bancor is a token exchange platform that lets users convert between tokens without intermediaries. It uses smart contracts to facilitate smooth, frictionless transactions. Bancor uses “connector modules” which are smart contracts that store different ERC20 tokens. Bancor’s formula constantly recalculates prices between connector modules and smart contracts.

Kyber

Kyber is a crypto asset exchange that uses derivatives to minimize the risk of cryptocurrency price fluctuations. Kyber Network is governed mainly by smart contracts that allow users to exchange or convert tokens. Kyber also offers cross-chain payment services in crypto.

Uniswap

Uniswap is a protocol for decentralized and automated token exchange on Ethereum. The protocol is composed of a series of smart contracts for ERC20 tokens, enabling easy swaps between Ethereum (ETH) to any ERC20 token. Transactions are mostly automated through these contracts, minimizing the trust required among different actors and removing middlemen.

Check out BitPR’s feature on Uniswap here.

Synthetix

Synthetix is a decentralized synthetic asset platform that launched synthetic bitcoin (sBTC). The synthetic coin allows trading of bitcoin-based currency pairs on the Synthetix exchange without needing to own the underlying asset. In addition to sBTC, users can trade a variety of crypto assets without using counterparties.

BitShares

BitShares is a decentralized crypto exchange that has also launched a template on Microsoft’s Azure blockchain. BitShares is a delegated proof-of-stake blockchain that lets community-chosen delegates manage the governance of its coin, the BTS. BTS also operates as equity, and is used as collateral for smart contracts, DEXes, and derivative creation.

Airswap

Airswap is a decentralized crypto exchange for ERC20 tokens. It also allows peer-to-peer transactions, combining both on-chain and off-chain solutions. It functions under four components: the Peer Protocol, Indexer Protocol, Oracle Protocol, and Smart Contracts. Through these, Airswap connects people who want to trade, indexes ETH tokens for trading, and provides market knowledge for informed trading.

Loopring

Loopring is an open source decentralized token exchange. It also allows users to create their own decentralized exchanges. With Loopring, users can broadcast signed orders without needing to make preliminary deposits before each transaction. It uses order-rings as a matching model, which can be composed of between two to sixteen orders that are settled in a circular manner.

InstaDApp

InstaDApp is a decentralized bank built on top of the MakerDAO protocol that lets users borrow, lend, and trade cryptos efficiently and seamlessly. Through InstaDApp, users can manage debt positions, collateralize crypto assets, and swap tokens. InstaDApp also makes it possible for users to collateralize multiple tokens and earn interest for staking DAI.

Stablecoins

These are digital assets designed to address the price volatility of crypto. This method of cushioning the asset from crypto fluctuation is done by pegging stablecoins to reliable fiat currencies or a basket of assets. Stablecoins can be used as a medium of exchange and a store of value.

TrueUSD

TrustToken’s TrueUSD is a stablecoin pegged on the US Dollar. TrustToken facilitates the deposit of USD to third-party escrow accounts before each TrueUSD is minted. The concept is to make sure that the amount of TrueUSD in circulation equals the USD in TrustToken’s reserves. TrustToken also offers asset tokenization services to allow fractional ownership of assets traded in exchanges globally.

Dai

Dai is a decentralized stablecoin pegged to USD. It means that each DAI is worth roughly one dollar. The goal is to reduce the price volatility of DAI compared to other coins. To support this, a system maintains stability of DAI through functions such as the addition and modification of existing Collateralized Debt Positions (CDP) and customization of risk and sensitivity parameters.

Derivative Protocols and Prediction Markets

Prediction markets are blockchain platforms where users can buy or trade their predictions on the possible outcomes for crypto-related or other events.

Augur

Augur is a decentralized oracle and prediction market protocol built on Ethereum. Augur rewards users who make correct predictions on topics ranging from crypto, sports, agriculture, stocks, and even the weather. Every time a user makes a prediction, smart contracts take care of the business logic that handles information recording on the blockchain, until an outcome for a specific event happens. Payouts are automated, and the whole process is not influenced by external parties.

Gnosis

Gnosis is a decentralized prediction market platform on Ethereum. It utilizes aggregated information predicted by users to determine a possible outcome for future events. Users can earn tokens by correctly predicting the answers for questions posted on the platform. Gnosis functions under three development layers: a core layer, service layer, and applications layer. The core layer is founded by smart contracts for events, outcome tokens, settlement, and other market logic. Gnosis has two tokens, the Gnosis (GNO) and OWL. GNO tokens are capped at 10 million tokens, and are traded in exchange markets. When users lock their GNOs in smart contracts, they receive OWL tokens which they can use to pay fees on Gnosis applications.

CDx

CDx is a protocol for the issuance, trade, and resolution of tokenized credit default swaps on the Ethereum. CDx also follows the 0x framework and lets perform  transactions off-chain while keeping the settlements and recording on-chain.

Daxia

Daxia offers a decentralized exchange that lets users issue long and short trading positions on several crypto assets, without needing to own them. Daxia uses smart contracts to ensure accessibility and transparency.

dYdX

dYdX is an open source crypto trading platform. It supports margin trading through custom non-tokenized positions. Users can also borrow and lend crypto without minimum amount requirements or fixed lock-up periods. dYdX allows users to track portfolio performance over time.

Veil

Veil is a peer-to-peer prediction market and derivatives platform that lets users buy leveraged positions on trading pairs such as BTC/USD, REP/USD, and ZRX/USD. Users can also make predictions on different events to earn crypto. Veil is a third layer application built on top of Augur, 0x, and Ethereum, that runs through relayers on the 0x protocol. This provides for a process that allows for instant settlement on Augur’s prediction markets. However, Veil is not available in the United States, Cuba, Syria, North Korea, the Crimea region, or any other jurisdiction where trading of derivatives or crypto assets are prohibited.

Protocols

Protocols are a series of smart contracts that perform specific digital financial functions for specific use cases. These protocols can be designed for funding, tokenization, security, and payments.

Bundling protocols

Basket Protocol is a series of smart contracts that allow users to create and trade baskets of ERC20 tokens. This decentralized protocol for basket trading allows users to buy or sell a diverse portfolio of crypto simultaneously.

Set is a decentralized platform for users to create, manage, and trade baskets of tokenized assets. A basket is a group of  crypto-assets that make up a portfolio. Set lets users create their own baskets by making their own Set, an ERC20 token. These can be traded among users. It functions with the help of decentralized applications that let users construct and trade financial instruments like index funds or ETFs. Set is trustless, and uses smart contracts to hold underlying tokens as collateral.

Fund Protocols

Melonport is a decentralized asset management platform on Ethereum. With Melon, users can invest in a portfolio of digital assets by holding Melon Tokens (MLN). MLN’s are used by users to set up digital asset funds, or invest through the Melon network. Melonport is run by a protocol that covers all aspects of the asset management lifecycle.

Tokenization Protocols

Harbor offers a legally compliant platform to tokenize private securities. To fully automate compliance with securities laws, Harbor created its own ERC-20 compliant R-Token which allows embedding KYC, AML, and other compliance features at the token-level.

Polymath a security token issuance platform built on Ethereum, hopes to bring trillions of dollars of financial securities onto the blockchain. Polymath envisions a future where stocks, bonds, private equity, venture capital and other asset classes are tokenized and traded without using the inefficient & costly traditional capital markets system. Enabling fractional ownership of assets using security tokens can bring liquidity to illiquid assets such as private company shares. Security tokens created on Polymath can be fully regulatory compliant. Since KYC and legal/compliance restrictions are built into the token, tokens can potentially be traded on any platform or exchange while remaining compliant with securities laws.

KYC, AML, and Identity

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Bloom

Bloom is a decentralized protocol for credit risk assessment on Ethereum, using attestation-based identity verification. It also uses the credit staking methodology to assess creditworthiness of individuals and organizations. Bloom offers cross-border credit scoring, backward-looking creditworthiness assessments, and a more effective and secure credit data management system. It functions under different systems covering different credit assessment areas such as identity attestation, credit registry, and credit scoring.

SelfKey

SelfKey is an open source, decentralized identity system that provides a technology stack including identity wallet services that comply with KYC laws and regulations. SelfKey functions on the concept of Self-Sovereign Digital Identity that lets users store identity data with full autonomy on how and when a stored information can be used. SelfKey can be used for digital signatures and private keys.

Blockpass

Blockpass is a self-sovereign identity application for regulated services and IoT devices. It allows users to create, store, and manage identities for different ‘things’ connected with the blockchain. Blockpass secures individual data ownership and control, by ‘hash’ codes that function as special identifiers for personal information. Information and other documents a user shares are verified by third parties.

Civic

Civic is an identity management platform. It allows  digital authentication without requiring physical IDs, usernames,  passwords, or two-factor hardware tokens. Network validators verify user identity on the blockchain, which they can sell as information to service providers that need them. It is run by smart contracts that govern data authentication and payouts.

Payment Services

Connext

Connext is a scaling solution for the Ethereum blockchain that enables easier and faster peer-to-peer payments. Connext offers a trustless system for micropayments on the blockchain through a layer two network. Through its Hubs, transaction volume and speed are improved, resulting in shorter confirmation times for transactions and low gas costs.

Request

Request is a decentralized financial solutions platform that lets users create, store, and access invoices and receipts on its network. Through Request, payments can be requested and settled easily within the network. It also secures transaction data and financial documentation, making it readable only by those involved in the transaction.

Ink

Ink is a decentralized payment system. Its main purpose is to help users securely send and receive payments and earn public reputation scores for successful transactions. Through decentralized reputation and feedback mechanisms, transactions on Ink are easier, faster, and cheaper. In marketplaces where Ink is adopted, buyers can see the reputation of sellers.

Groundhog

Groundhog is a decentralized payments solution on the Ethereum network. It aims to enhance digital commerce in the crypto ecosystem by making it easier for companies to set up subscription services and recurring revenue systems. Groundhog offers payments services to non-crypto companies as well by allowing them to convert subscription payments to fiat currencies. Groundhog is partnered with stablecoins such as DAI to let users have the option of using currencies that are less volatile and denominated in their local currencies.

OmiseGO

OmiseGO is a decentralized bank, offering payment solutions and digital wallet services. It uses a proof-of-stake algorithm, and the infrastructure is composed of a series of smart contracts. With OmiseGO, users can participate in peer-to-peer transactions using almost any ERC20 token or fiat currency. It also provides a white label eWallet that lets developers design their own wallets and custom app integrations.

Wallets

Wallets enable secure storage of digital assets. They may also offer features that enable peer-to-peer transactions such as trading and payment.

Coinbase Wallet

Coinbase Wallet supports numerous coins such as Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), Litecoin (LTC), and other ERC20 tokens. The wallet is secured by biometric authentication technology and includes payment features. Coinbase Wallet also offers trustless trades by linking users to decentralized exchanges and relayers.

Trust Wallet

Trust Wallet is Binance’s official cryptocurrency wallet that supports most crypto, including ERC20 and ERC223 tokens. It is also connected with Binance DEX to make it easier for users to trade seamlessly. Trust Wallet lets users interact with decentralized applications (DApps) from the platform.

Status

Status is an open source messaging platform and web 3.0 browser that can be used to connect with decentralized applications on Ethereum. It lets users send and receive encrypted messages, smart contracts, and payments. The Status messaging app can also be used to store crypto in its built-in Status Wallet.

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