Decentralized finance or “DeFi” is a big buzzword this year, for a number of reasons. Most prominently, the growth of Blockchain networks has been dramatic, and the symbiotic public awareness of both blockchain technology and the need for new financial systems, has led to a lot of institutional and government buy-in for DeFi platforms.
Already, hundreds of DeFi platforms have emerged to fill this space, leading the team at Consensus to declare 2020 the year of DeFi.
Within that context, XAR Network has been doing a lot to connect traditional systems with new blockchain-based structures and innovative digital asset resources.
Tools like those pioneered by XAR will change transaction processes, including verifications, protocols and more. In an ecosystem increasingly defined by disparate platforms offering nuanced functionality, XAR network serves as the glue the holds them all together.
At the same time, comprehensive services like Cred, which functions as the largest decentralized lending and borrowing platform, is bridging the gap between traditional expectations from the financial services industry and new opportunities afforded by DeFi.
Collectively, it’s clear that DeFi will be one of the primary expressions of blockchain technology, and the movement is bringing real change to the existing financial infrastructure.
Here are some of the big moves that analysts see taking place throughout this year as new digital finance methodologies catch on.
#1 Innovating International Payment Systems
Up until now the SWIFT protocol (and other similar dinosaurs) had been a major way that banks would move money across national borders.
This process is quickly becoming obsolete due to new verification mechanisms, payment gateways and transaction paths made possible by decentralized consensus-based finance operations.
New networks that accommodate DeFi and related methodologies often use the premise of the blockchain to remedy shortcomings in traditional fiat currency transaction systems.
For example, a method of collateralizing assets may provide seamless transparency across the transaction life cycle.
New frameworks allow stakeholders to move money internationally, without the elaborate and rigid verification processes inherent in SWIFT.
It's one more symbol of how new decentralized technologies work in a global economy to rapidly transform our financial processes. .
What’s more, permissionless processes for international banking can be a Bridge to a new financial realm, in which the owners of financial processes can open their doors to cross-platform transactions, more confidently and more securely, and with fewer of the traditional verifications that take so much effort on everyone’s part.
This introduces the second and more comprehensive trend that we are likely to see in most of the DeFi space soon: the rise of the trustless transaction as a compelling standard.
#2 Trustless, Zero-Knowledge and Permissionless Systems
One of the biggest sea changes in decentralized finance is the emergence of systems that can automatically verify transactions.
Saying that these are game-changers is an understatement. Just years ago, third parties like PayPal, Stripe and others pioneered new payment technologies outside of the traditional banking world.
But these processes have their own very established verification processes that take days, and require items like multifactor authentication.
We’re not even that far advanced in biometrics, which would eliminate a lot of the user error that pads costs for services.
By contrast, tomorrow's systems are going to be so incredibly streamlined that they'll hardly register with stakeholders who are pushing through elaborate digital transactions.
Take a look at this commentary on how new protocols have lowered the gas cost for zk-SNARKs, one of the common emerging protocols for bypassing traditional types of knowledge-based verification.
Again, establishing those kinds of systems that bypass yesterday’s verification processes will revolutionize how we view money. With the advent of permissionless transaction technologies, many new types of business are made possible.
#3 Lower Costs of Doing Business
Another aspect of these changes is reflected in the ways that efficiencies are going to eliminate various transaction costs, in part by solving any number of Byzantine fault tolerant consensus problems.
Taking the example of SWIFT, we see how new companies are streaming into the gap to offer lower-cost payment methods, in some of the same ways that today's most popular point-of-sale systems have decreased PCI costs for retailers.
“While DeFi is covering a wider range of areas — from remittances to derivatives and investments — its most promising sector involves credit and lending,” wrote Simon Chandler at Cointelegraph last May, noting the potential of the tech to broaden and optimize lending outcomes “That's because, thanks to the openness, security and transparency of blockchains, it's possible to make loans and credit available to a larger pool of people than ever before, while the interoperability of blockchains opens up the possibility for creating a spectrum of new lending products and services.”
Here’s where companies like Cred come in: by innovating in DeFi, Cred offers lower than usual interest rates and other opportunities to users, on a platform meant to show how new blockchain efficiencies get done.
It’s likely that investors and others will soon see these savings reflected in both capex and opex in enterprise IT, and at point of sale points like Bitcoin ATMs that are now somewhat common on the American street and elsewhere in the world.
#4 Layer 2 Payment Systems and Rapid Networks
New layer 2 payment solutions are helping to establish rapid payment networks such as the Lightning Network. The Ethereum hard fork Istanbul is offering enhanced layer 2 solutions.
The effective results are going to be evident in the numbers of transactions per second that user companies can handle while scaling their systems.
In the words of Nischal Shetty writing at Entrepreneur.com, this will bring us “unforeseen market efficiency.”
Closing Thoughts
In 2020 and beyond, DeFi looks likely to become much more than just a buzzword. Today’s financial system is desperately in need of an overhaul that improves its processes and maximizes its potential for the digital age.
The more inclusive, streamlined, and secure processes offered by the latest DeFi platforms will be the vehicles that drive this transition.
That’s why the latest blockchain platforms are attracting so much attention. Specifically, the XAR Network provides a lot of that fundamental tech which will allow these new ways of doing business to flourish.
Similarly, Cred, and platforms like it, are creating the services that users expect from their financial platforms.
Although MakerDAO and related resources pioneered the early steps toward collateralizing blockchains, XAR Network is rolling the ball forward in bridging banking and fintech divides.
Look for these trends to become part of a much more vibrant digital finance sector globally this year, and in the years to come.
In the year ahead, DeFi seems certain the transition from a buzzword to a life changing technological evolution that brings our financial system in-line with our digital ethos.
This is good news for blockchain platforms, financial institutions, and, most importantly, the consumers that will reap the benefits of new and better processes.
Disclaimer: The content of this article is sponsored and does not represent the opinions of Finance Magnates.
