DeFi – A new fintech business idea

Short for “Decentralized Finance”, DeFi is decentralized finance. It is a broad concept that encompasses all disruptive technology that removes the need for intermediaries in financial applications.

In addition to Bitcoin, the blockchain brought several possibilities for innovation, allowing not only the tokenization of practically everything, but also the decentralization of processes such as loans or even asset brokerage.

Defi Overview

The re-creation of financial banking services without centralization and traditional intermediaries started with Bitcoin. Without a central organizer for issuing coins, bitcoin is the first and greatest example of DeFi.

But the concept has evolved, especially with Ethereum and its more comprehensive and flexible smart contracts than those found in Bitcoin. As a result, a series of applications, previously only carried out in the traditional and centralized financial market, started to emerge using blockchain.

“DeFi’s goal is to rebuild the banking system for the entire world in this open and unpermitted way,” says Alex Pack, managing partner of Dragonfly Capital.

DeFi – A new fintech business idea

The new global financial infrastructure brought by the development of DeFi (decentralized finance) places users on the same level as shareholders. This is so, because in DeFi, which can also be defined as a protocol system, most of the value generated returns to the base protocol and not to the application. In turn, the protocol is divided into small governance chunks known as “governance tokens”, transferable and with voting rights. A revolutionary concept, because for the first time it is all the users and not only the shareholders who benefit from the success of a project, as is the case with a DeFi protocol.

It is wonderful to see how the market constantly replaces leaders in specific sectors to give way to new forms of business with much better technological and innovation models. The magic of competition and the free market is this, which lets the ancients fall, with their traditional models. Good at the time, but inefficient over the years. Younger, more efficient and much more competitive companies emerge. In the end, the market always looks for those companies that add the most value to society. It is something similar to what happens in nature, which gets rid of the old to make way for the new.

Perhaps the sector that least follows this rule of nature is the financial sector. Probably the most relevant change is the improvement in the efficiency of some processes thanks to FinTech. FinTechs promote the digitization of processes, generating a “0 cost trend” in transactional movements.

From FinTech to DeFi

As a consequence, today we find ourselves in a scenario that few could foresee a few years ago. The financial system is in full disruption due to FinTech, combined with the arrival of the most disruptive technology of financial models that we have ever seen: DeFi. DeFi, or decentralized finance, is financial services on top of public blockchains with the potential to radically transform today’s financial system.

The current financial model could be defined as a money transmission structure divided into three parts. First of all, we have the Central Banks. These institutions are responsible for defining and shaping monetary policy within a nation or set of nations. That is, they have the power to manipulate the available money supply. His criteria always seem aimed at trying to stimulate the economy and avoid moments of crisis with great job losses.

In a second layer are commercial banks, which act as intermediaries between citizens and the Central Bank. Through them we can save and transfer money, in digital format, around the world. Commercial banks compete with each other to accumulate the maximum number of customers and money deposited. This gives them the power to generate a business model based on loans and commissions.

Generation of new applications

At present, the advantages of blockchains like Bitcoin or Ethereum stunned the world. Some visionaries found the possibility of using this technology as a technological base to develop top applications. That is, create applications to transfer value without intermediaries. This is where DeFi technologies were born. The DeFi are protocols that offer the financial services that we find in the traditional system, but in a decentralized way.

The main differences of DeFi with current traditional financial services is that they are open. Anyone can use and benefit from these protocols. You only need a wallet and an Internet connection. For example, unbanked people have the possibility of participating in a new financial system at practically zero cost.

They are decentralized. The protocols do not have an “owner” or an organization behind them with the power to change the rules or interfere. In DAO’s (decentralized autonomous organizations), their governance; that is, decisions about how the protocol will advance are decided jointly by those who participate in the protocol. In addition, they use decentralized monetary policies, which are not manipulated by institutions and governments.

Finance without hours, 24 hours a day

There is no friction. Thanks to Blockchain and the value transmission system without intermediaries, they are much more efficient. There are no schedules. They don’t close on weekends, like the stock markets. Another advantage is that everything is programmable. This allows the generation of products that are non-existent in the traditional system and impossible to develop. A clear example is the flash-loan or flash loans.

The main differences between FinTech and DeFi are many, but the most important are two: DeFi implies a complete decentralization of each and every process, including governance. There is a less purist version, known as Open Finance, financial protocols programmed on a Blockchain but that work centrally like the current systems.

The value of the protocol

The second big difference is that the development of DeFi protocols work in a new system, apart from the traditional one. FinTech ultimately continues to depend on Central and Commercial Banks, in addition to not offering any improvement in terms of monetary policies and the form of money used.

DeFi can also be defined as a protocol system, since most of the value generated returns to the base protocol and not to the application.

Contrary to what happens in most current platforms, the value of decentralized systems returns to the protocol. In turn, the protocol is divided into small governance chunks known as “governance tokens”, transferable and with voting rights. It is a revolutionary concept, because for the first time the success of a project, such as a DeFi protocol, benefits all its users and not just the shareholders.

The user, the new shareholder

Clearly, the incentive is to create products for the people and not for the shareholders, as it will increase the total value of the protocol even more. We are not only facing finances that are open to the world. We are facing a core-design designed to add value to the user, not to the shareholders. Without a doubt, we are facing a revolution.

In conclusion, DeFi represents a new global financial infrastructure, which allows offering the same financial services as the traditional system with significant competitive advantages. The largest DeFi system is Bitcoin. Born in 2009, with a capitalization of 0 and a value of $ 0.009, today it has a capitalization of $ 170,000 million and a value of $ 9,958.

However, Ethereum is the main Blockchain where these more complex protocols are being developed, which include products such as lending, derivatives or trading services.

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