Money received a makeover with the advent of Bitcoin in 2009. Satoshi Nakamoto’s roadmap created a framework for the blockchain industry to flourish and grow. The blockchain industry has experienced different stages of growth in a little over a decade, it has managed to do what the traditional system has been unable to do for decades. We can begin from the early stages of Bitcoin to the exchange hacks that lead to better security detail in 2014. The ICO (Initial Coin Offering) boom of 2017 and the bullish all-time high of 2017. And just after the IEO (Initial Exchange Offerings) phase 2019, the DeFi phase is the trend now.
What is DeFi
DeFi stands for “Decentralized Finance.” It represents the entire banking/financial ecosystem built on the blockchain. It’s a combination of the lending, borrowing, staking properties of the banking system and digital assets, protocols, Dapps, exchanges and smart contracts of the blockchain. There is a huge market for DeFi as a report from Business Insider indicates, over 2 billion people are unbanked globally.
DeFi is an umbrella term and it covers a variety of financial applications that the blockchain can disrupt to provide a trustless and seamless system. DeFi is geared toward disrupting financial intermediaries. It is a system automated with the blockchain, smart contracts and digital assets to reduce reliance on intermediaries creating an effective and fast system.
Merits of DeFi
To bring more perspective to the usage of the DeFi, Nick Cannon head of growth of Bloqboard DeFi believes it will create a healthier financial system. He believes that DeFi will bring greater accountability to the financial market regardless of geographical positioning.
Rather than utilising the traditional systems that allow you money via middlemen, DeFi eliminates these middlemen that ensure you incur extra costs on transactions. Instead, you utilise a decentralised system where you can borrow money and receive it directly into your local bank account so long as you own some digital asset. Transactions are monitored by smart contracts and a repayment system is atomic and flexible.
Since DeFi runs a decentralised system, there is no need for middlemen and this presents a higher opportunity for profits. Some platforms offer up to 70% of their fees to the lenders and that is not something you get in a traditional structure.
Builds a more Transparent and Accountable System
One of the benefits of the blockchain is it’s transparent and trustless nature. Since DeFi is built on the blockchain, transactions can be recorded and monitored in an immutable manner thereby curbing corrupt practices common in the mainstream traditional institutions.
Diverse Baskets of Cryptocurrencies To Transact with
The DeFi structure is beginning to grow vast and now offers varying options of cryptocurrencies to choose from. A platform such as Nexus offers up to 20 digital assets to choose from as the ecosystem grows, more will be added.
Problems Facing DeFi Ecosystems
It’s a Relatively New Field
DeFi is like the new kid on the blockchain and there is still room for further research and development in the field. The DeFi Ecosystem aims to bring finance to the doorsteps of everyone in the world. There are still challenges facing DeFi such as regulatory compliance, security threats acceptance and the likes. As these challenges are fixed we will see a more robust ecosystem.
Naturally, cryptocurrencies are volatile. In recent times we have experienced a spike in the price of Ethereum and then Bitcoin. The Volatile nature of cryptocurrencies is of concern to the mainstream financial institutions seeking to embrace DeFi. However, a solution would be to introduce more stable coins to reduce this volatility to the bare minimum. Some stable coins such as Tether, USDC, BUSD are pegged to fiat currencies like US Dollar, British Pounds, Chinese Yen, Nigerian Naira etc are introduced. Although they are semi decentralised, they provide a sort of insurance to financial systems seeking to test waters with the blockchain.
One of the greatest challenges facing the decentralised system is hacks. Although the blockchain can not be hacked, exchanges can. Back in 2016, the DAO $50m hack occurred and recent times have seen the BZX DeFi double hack of $1m. In other words, DeFi security architecture needs a lot of improvements. Inputting steps such as On-Chain Governance, Multiple Oracles and Multiple Smart Contracts Audits will improve the ecosystem considerably.
The Place of DeFi in Financial Systems
There are multiple reasons why we need DeFi in our financial systems. They include,
Elimination of Excess Remittances and Transaction Fees
Many developing nations depend on remittances from their citizens abroad who send funds to their home countries. Remittances serve as a much-needed source of funds for many developing nations. DeFi is focusing on transforming remittance and reducing the wait time and pepper trail these transactions have to go through. There’s also plans to reduce the exchange rates and transaction fees that can be ridiculously high sometimes. Remittance is a huge source of revenue for Africa. In 2019 alone, Nigeria received $17.57 billion in direct diaspora remittances. The remittances rose by 56.4% from $11.23 billion in 2018 to $17.57 billion in 2019. It is surprising to know that most of the remittance that comes into the country go through unofficial channels. This means that the actual remittance amount is higher than the documented amount. Also, banks do not help matters with Nigerian banks being known for charging excessive fees for transactions and other maintenance fees.
Curb corruption and reduce Inflation
The use of DeFi in financial systems is inevitable. Inflation is reducing the buying power of money and countries like Venezuela and Zimbabwe have had some of the worst hits. Central banks are trying to print more money and it isn’t helping the situation and most of these countries have turned to cryptocurrency. Also, DeFi can curb corrupt and excessive practices of government officials as records are public and funds can easily be traced. With the rising cost of living, increasing unemployment rates, violence and unrest, it is clear that more governments will be turning to decentralised solutions.
DeFi also aims to provide solutions to insurance buying and reduce the high-interest rates on loans. This will also cut out the long processes and paperwork involved in most of these financial activities.
What can Algorand Foundation Do Differently?
Algorand was created as a response to the gap in creating a borderless, decentralised, transparent and permissionless economy built on the blockchain and bound by the principles entrenched in DeFi. Algorand was created by Award-winning Turing cryptography, Silvio Micali. It is the world’s first open-source and pure proof-of-stake blockchain protocol. It aims to create a next-generation level of financial products built on DeFi.
By providing next-generation tools, Algorand Foundation is focused on removing friction from financial exchanges. Its models focus on making Algorand the blockchain of the future and the internet 3.0 The aim is to facilitate the exchange of value, build new financial tools and services, provide an on-chain privacy model that makes transactions easier, safer and faster.
Algorand is changing the future of DeFi through the following means.
To reduce confirmation time during transactions, the Algorand 2.0 is enabled with Algorand Standard Asset (ASA) technology [Layer 1] and ASC1 smart contracts. What this does is that it makes it easier to tokenize and issue any type of asset on the Algorand blockchain. This means that block confirmation time will be reduced and transaction fees cheaper.
Reducing volatility in Cryptocurrency
Stable coins can help reduce volatility and Algorand is utilising Tether. What this means is that with the combination of the speed, scalability and liquidity Algorand provides, transactions can be more stable and decentralised by stable coins.
Asset Tokenization: storing real-world assets and values on the blockchain such as certificates, real estate, loyalty points, etc.
Interoperability and Scalability
Atomic transfers with Reduced fees etc.
Removes the Restrictions on Accessing investments
Utilises Pure Proof Of Stake Consensus Protocol
Reduce the intermediate interference on cross border transactions.
Reduce fees on remittance and cross border transactions.
The future of financial transactions is DeFi. It seeks to create a future where financial transactions will be built on the blockchain. Assets Management, insurance, remittances and settlements are other areas Algorand DeFi will decentralize. The hope of having a future where financial institutions are transparent and accountable and decentralized globally. Although the DeFi sector is faced with challenges such as security and volatility, Algorand is working towards mass crypto adoption through continuous research, development and mass education. Algorand Foundation is also working on it’s cutting edge technology to improve the future of finance. “Algorand Foundation has a vision for an inclusive ecosystem that provides an opportunity for everyone to harness the potential of an equitable and truly borderless economy”