What is DeFi?
The rising popularity of cryptos, which function on the back-bone of blockchain technology, has led to innovations, giving rise to its adoption by DeFi organisations. Let’s understand the meaning of DeFi viz. decentralised finance, which uses blockchain technology on which cryptos also operate.
DeFi functions on blockchain technology to eliminate intermediaries in financial transactions. The constituents of tech DeFi are open protocols, public smart contract platforms such as Ethereum blockchain, decentralised exchanges, decentralised applications (dApps), and stable-coins that facilitate the development of applications. DeFi infrastructure and the regulations governing it are still under various stages viz. exploratory, consultative, development or finalisation.
How DeFi Organisations Aim to Democratise Finance?
The leading organisations are migrating towards adoption of blockchain technology, Bitcoin, and other cryptos. The successful roll-out of organisation-focused DeFi tools, infrastructure, products, and services would cater to the enhanced security, execution, and compliance requirements. DeFi organisations ensure quicker, secure, real-time, and seamless execution of every transaction at reduced costs. The question arises – how tech DeFi organisations use disruptive technology leading to a paradigm shift in the conventional financial ecosystem?
How Does Tech Stack Enhance DeFi Capability?
Applications are created by the developers using a set of tools called Tech Stack. It comprises software applications, coding languages, and frameworks that help in understanding some characteristics of the programme. A tech stack has two equal elements, namely, front-end or client facing, and back-end or network side. Tech Stack puts DeFi in the context of the crypto world, and facilitates understanding of different blockchain ecosystems, where tech DeFi protocols could be deployed upon.
The tech DeFi protocols function on smart contracts enabled by Layer 1 blockchains, namely, Ethereum, Binance, Avalanche, Cardano, and Polkadot. The tech DeFi protocol can’t be run on Bitcoin, as it doesn’t support smart contracts. While most tech DeFi protocols run on Ethereum platform, other competitors are emerging in the form of Binance Side Chain (BSC), where transaction cost is far lower than Ethereum. Other blockchains Cardano, Polkadot, and Avalanche also claim compatibility with Ethereum applications. However, traction for these blockchains is yet to gain popularity.
Contributions from Tech Stack Enabled DeFi Organisations
According to DeFi Pulse, the valuation of assets locked on Ethereum-based protocols has reached USD 100 billion (equivalent to INR 750,000 crore) from a meagre level of USD 600 million (equivalent to INR 4,500 crore) in 2019. In accordance with conventional economy, most of the present activity on Tech DeFi focuses on the lending and borrowing of digital assets. The wider class of applications backing other financial activities offered by Tech DeFi are compared with conventional finance companies or new-age FinTech companies in the following table:
|Activities / Organisations||Conventional Finance||FinTech||Tech DeFi|
|Assets / Digital assets||Shares, debenture, bonds, currency, commodities, properties, intangible assets||Stable-coins, NFTs, tokenised shares or real estate|
|Asset management||Mutual funds, passive funds, hedge funds, private equity, PMS, structured products, venture funds||Robo-advisors, impact investments, WealthTech, automated asset allocation based on risk profile||Set protocol, Zapper, InstaDapp, DeFi saver|
|Derivatives||Derivatives markets, broker-dealers||dYdX, synthetix, UMA|
|Exchange||Stock and commodity exchanges, stockbrokers, online trading platforms||Neo banks, centralised crypto exchanges, social trading platforms||1 inch, curve finance, loopring, pancakeswap, uniswap|
|Insurance||Banks, insurance companies, insurance brokers, aggregators||InsurTech||Cover protocol, etherisc, nexus mutual, opium insurance|
|Lending and borrowing||Banks, NBFCs, Credit societies, mortgage companies||Neobanks, P2P lending, BNPL, payday loans, centralised crypto protocols||Aave, compound, cream finance, maker, trueFi|
Salient Features of Select DeFi Organisations
- Compound: Happens to be a decentralised lending protocol facilitating lending and borrowing of crypto assets.
- Uniswap: It is a decentralised asset exchange protocol, without having a custodial facility, which enables trading of assets by liquidity pools.
- Nexus Mutual: Has established itself as a decentralised insurance provider that offers users to buy protection cover as well as participation in claim settlements.
- Set Protocol: It is a decentralised asset management Tech DeFi, which permits to create or invest in a basket of underlying assets, including cryptos and tokenised equities.
- Synthetix: Is a leading derivatives’ liquidity protocol for synthetic crypto assets, offering a platform for derivatives trading in the Tech DeFi space.
- Automated Market Makers (AMMs): Is a Tech DeFi innovation, replacing the conventional order book system of exchange with liquidity pools. A liquidity pool could have stock of two assets, say Cardano and Polkadot, which users are allowed to trade between.
The crypto industry is fast evolving and moving towards maturity. The market participants have to adapt to the dynamics of the industry by keeping themselves abreast of the latest market developments besides understanding crypto as an asset class. DeFi or Tech DeFi organisations are just an example of numerous classes of applications being created using blockchain technology. It is becoming part of the decentralised finance ecosystem by offering financial services in an open-source and transparent way. The access to the emerging technology is available to everyone with reduced transaction costs. With the growth of a diverse ecosystem, it would be interesting to witness what other innovations pan out in the coming days.
Having understood the essence of DeFi, Tech DeFi, and DeFi organisations in the emerging and innovative space of blockchain technology, where crypto is an integral part of financial transactions, you can start buying and/or selling cryptos on one of the oldest crypto exchanges in India, Zebpay.