The discovery of cryptocurrencies has gone hand in hand with the discovery of other possibilities of the blockchain. Let’s take a look at the different (potential) cases of using blockchain technologies. In particular, in this article we will focus on DeFi, which stands for Decentralized Finance. Why do we do that? Because we think this sector will have the biggest impact on our daily lives.
First, we’ll explain what DeFi is, then outline different situations where it’s going to be an important part of our lives.
- 1 What is Decentralized Finance (DeFi)?
- 2 Exchange platforms
- 3 Stablecoins
- 4 Loans
- 5 Decentralized games of chance
- 6 Real estate on the blockchain
- 7 What does this mean for our future?
- 8 Which other companies are working on the above examples?
- 9 Conclusion
What is Decentralized Finance (DeFi)?
When we talk about Decentralized Finance, which we will call decentralized finance in this article, do we mean the entire cryptocurrency ecosystem? Not really, because if the latter allow the transfer of value without central control bodies, we can’t really define them as financial products.
In addition, let’s not forget the term “decentralized” in the DeFi name, because today a lot of players in the ecosystem are decentralized. In fact, most exchange platforms are traditional companies that provide efficient yet centralized services.
Thus, decentralized finance represents an ecosystem in which everyone can benefit from various financial services and products without control bodies. This means that any user could access loans, for example, without any discrimination. Today, access to technology is no longer the main barrier to accessing financial services.
After all, most people outside the banking system have access to the internet. This is also one of Libra’s arguments. Mostly it concerns identity issues or political restrictions that prevent access to banks. Decentralized finance therefore wants to offer their services to everyone, without any restrictions.
Today we are at the beginning of DeFi, and things are moving very fast. Many projects appear, and existing projects are gaining momentum. More and more users and thus liquidities and volumes are coming to the various DeFi applications. The user experience, one of the main obstacles to adoption by the general public, is improving and decentralized financing is coming to our smartphones.
Decentralized platforms have made their entrance with Ethereum in particular . After all, smart contracts that make it possible to create tokens according to a very precise and widespread standard simplify their implementation. So it concerns exchange platforms that are comparable to the traditional ones, such as Coinbase or Kraken for example.
But while these are centralized, you deposit your funds into the platform and hope you can get them back. Other platforms are decentralized, where your cryptocurrencies don’t leave your wallet , and it’s user-to-user exchanges that are set up. They use advanced features like atomic swaps to enable faster token exchanges between users.
Unfortunately, decentralized exchanges are still in development and do not yet offer the exchange volumes and interfaces that are as interesting as traditional exchanges. But DEXs (decentralized exchanges) are evolving very quickly and it is now “very easy” to use their services. Some of these decentralized platforms have the peculiarity of allowing the purchase and exchange of non-fungible tokens (NFTs).
So in the future we will see more and more that we can use such decentralized platforms. Here we are no longer bothered by large companies that are in between. This often costs a lot of money. For example, think of websites where you can bet on sports matches. You always pay transaction costs to the website. Or how about marketplaces where you have to pay money to place an ad? That is a thing of the past when we use decentralized exchange platforms.
Behind every cryptocurrency is usually a company, or a group of people, trying to carry out a project. While there are usually several projects, some may have something in common and pursue the same goal.
For example, several cryptocurrencies fall into the ‘ stablecoins ‘ category. This term comes from English and, as the name suggests, this crypto asset seeks to bring stability to this highly volatile market. The special thing about stablecoins is that their value is supposed to remain constant in euros or dollars. This is true regardless of the value of Bitcoin or the market as a whole. So a stablecoin will always be worth 1€, or 1$ for example.
What is the point of stablecoins?
As you know, to get altcoins you first had to get Bitcoin or Ethereum from sites like Coinbase. You then have to transfer these cryptocurrencies to exchanges such as Binance or Bitvavo. When you want your winnings back (if you have any), you have to convert these cryptocurrencies back into BTC and send them back to Coinbase. You can then convert them back into euros or dollars. This was a bit cumbersome and you will have to pay transaction fees every time.
This was how the system worked, as very few exchanges allowed trading directly with fiat money. Let’s say you want some of your money in fiat and some in cryptos. However, you want to keep your fiat money on exchanges so that you can take advantage of a good opportunity that presents itself. In theory this is not possible because you have to make transfers to sites that allow you to convert fiat into crypto.
This is where the so-called stablecoins come in. Most exchanges have a stablecoin that can act as a fiat currency. So if you want to have some of your money in euros or dollars, you can buy a stablecoin that will always be worth 1 euro or 1 dollar.
With this system you no longer have cumbersome and expensive transfers between the exchanges. You can immediately and cheaply convert part of your cryptocurrencies into an asset that will always have a fixed value against the dollar or the euro.
How stablecoins change our lives
There is a very good chance that we will all pay with stablecoins in the future. Cryptocurrencies like Bitcoin are far too volatile to serve as a means of payment. That is why it is important to have a cryptocurrency that always represents the same value, so that it can be used by consumers, companies and governments.
Several banks are currently investigating whether it is possible to develop a monetary stablecoin. Take, for example, the European Central Bank (ECB). More and more people want to get rid of cash, and that is why it could happen that in a few years we only use stablecoins.
Facebook also gained a lot of fame when they indicated that they were working on their own stablecoin, called the Libra. They want to release this soon, and it contains a number of unique features that you do not see with every stablecoin. So it’s clear that stablecoins today can do a lot more than they were once intended to do.
Access to loans is not possible for everyone, even if there is a guarantee (mortgage, etc.). In addition, the fall in interest rates makes lenders reluctant to provide their funds. The different loan systems offered by the ecosystem provide an interesting alternative for both borrowers and lenders. Working on a P2P basis (without an intermediary), users can lend their cryptocurrencies to earn some interest.
A decentralized loan system thus brings many advantages. The immediacy of the transactions makes it possible to borrow over very short periods, for example a few weeks.
No salary check is necessary, everyone can borrow. People outside the banking system could therefore gain access to their first loans in this way. Most of the loans provided are made to be used on exchange platforms that currently use leverage or other brokers.
Decentralized games of chance
Decentralized market forecasting is a somewhat obscure part of decentralized financing. While these types of systems are widely used in today’s financial world, they are usually internal, or completely centralized like Aladdin. The implementation of these systems is complex, despite the potential of these types of services. The players in this sector offer different solutions, such as setting guarantees in case of prediction failure, and rewards in the opposite case.
Today the main players are Augur , which allows to make predictions on numerous topics, as well as Gnosis , which focuses on the crypto markets. Today, these players are still struggling to attract users. Prediction volumes are still quite low, but the following features should allow more pulls to their services.
What role will this play?
Nowadays games of chance are always centralized. That means there is another party that has control over this. So you might ask yourself how fair this is, because the third party is always the one who makes the most money from it.
The blockchain is open source, which means that no one can keep anything secret. So it is much fairer for both players and providers of players to run games of chance on the blockchain. This way you can rest assured that everything is set up in a fair way and that you will not be scammed.
The costs will also be much lower, because the transaction costs are simply lower than the costs for labor, as must be paid for centralized games of chance. This means that it can be financially more attractive to use decentralized games of chance.
Real estate on the blockchain
You may be wondering how on earth it is possible to put real estate on the blockchain. It is therefore perhaps the most striking part that you will come across in this article. To make it a bit clearer, let’s first explain a little more about tokenization.
What is tokenization?
It is possible to put a physical product on the blockchain. This is known as tokenization of the asset in question, meaning that a token directly represents an underlying asset and its value is determined relative to that asset. That may sound a bit vague, but it’s actually much simpler than you might think.
Tokenization brings many benefits in terms of transferring assets between buyers and sellers and reducing friction in the latter’s creation and exchange phases. In the context of the Ethereum ecosystem or other smart contract platforms, it also brings many possibilities in terms of the functionalities of these security tokens . Smart contracts bring transparency and globalization to the exchange of valuables, while taking advantage of the security of the platforms on which they are deployed.
There are several asset digitization systems that have different characteristics, such as debt synthesis. Direct tokenization allows the underlying to be represented while providing the rigidity of traditional procedures. But this is not limited to real estate and can also be used in other sectors such as art or precious materials. Or how about loans and debts? You could convert these into a token, and then sell them to others.
Real Estate Tokenization
It is therefore also possible to convert real estate into tokens on the blockchain. RealT is one such project that will enable the tokenization of real estate in the United States to democratize investment in this sector. In fact, you can own a building for a few hundred euros, without a loan. This is done through Ethereum tokens and companies that own these properties. The owners of the tokens do not share ownership directly, but in a company that owns the ownership.
The tokens used in this way, the RealTokens, are just ERC-20s, very standard tokens in the ecosystem. These tokens each represent a share of the company, and since the company only owns the real estate in question, we can extrapolate this token as a share of the building.
But if you do indeed co-own the property, don’t worry about the issues associated with managing the rental, as RealT takes care of it. In fact, the company offers services related to rent management such as home maintenance and rent collection.
RealT also wants to solve the problem of liquidity of the real estate market, mainly by increasing the number of potential buyers. It is indeed easier to find a hundred investors of several thousand dollars than a single larger investor. But tokenization also reduces friction in real estate investments. For example, investors are no longer required to rely on notaries as the RealT team handles these issues.
Today, the company offers real estate located in the United States for investment by citizens from many countries, including Europe. RealT wants to expand and also offer European properties to its customers, which will require greater administrative rigor. In addition to a wider catalog, clients will benefit from European investment protection and anti-money laundering protection.
What does this mean for our future?
How will this affect our lives? The availability of real estate on the blockchain will make it more difficult for criminals to launder money. Although it will have a very powerful leverage effect, this type of investment generally requires access to a real estate loan, and these are not so easy to obtain depending on your status : students, entrepreneurs, freelancers or employees on fixed-term contracts have it. difficult to get real estate loans.
By lowering the entrance fee for this type of investment, people who until now have not had the chance to participate can now do so. Even for smaller amounts, it can be formative, enabling the development of passive income in a new way.
This makes it much easier for people to monitor their money against inflation. Normally they could only invest in gold, crypto or stocks, because you need much less money to start with this. Real estate would never have been an option. And that’s a shame, because the gap between rich and poor seems to be getting bigger and bigger.
In this way, one can build a portfolio of investments that is much better diversified. You are then no longer dependent on a small number of investment products, as was the case before.
Another advantage is that it is much easier to invest in real estate this way than when you do it the traditional way. You would then have to go to a notary several times to sign papers. In addition, there is also a greater chance that you will be scammed. Because the blockchain uses smart contracts, it is very easy to set up an escrow. This ensures that everything will take place according to the agreed rules.
This is a major advantage in the current housing market, where it is difficult for almost everyone to buy real estate. Let alone invest in it unless you have a lot of money at your disposal.
Which other companies are working on the above examples?
Let’s take a quick look at the players in decentralized finance, and the projects they support. This way you know which companies are already working to realize the above situations. Obviously we can’t present them all, and my selection does not mean that they are the most interesting projects. Several DeFi themes are covered in this list.
One of the major players in decentralized finance. The services are mainly based on the Ethereum platform. In particular, these are the initiators of the stablecoin Dai, whose stability is based on the collateralisation of ethers (and other options to come). These loans with a guarantee of up to 150% make it possible to stabilize the price of the token despite rises and falls in the cryptocurrency used as collateral.
MakerDAO works in a decentralized way. The community is often consulted on its development. The right to vote is proportional to the number of Maker tokens users have. This allows anyone interested in the project to participate.
In practice, things are more complicated, because recently there was a vote to adjust the Dai’s borrowing costs, and everything didn’t go as one might imagine. In fact, a single entity owned about 95% of the voting rights. Moreover, most users do not vote with Maker and thus leave a gap for whales (people who own large amounts of one crypto), this reduces the interest in setting up votes.
You probably know Binance, which has managed to forge a foothold in this competitive market and develop extremely fast in just a few years. But it is its little brother that we are going to talk about, Decentralized Binance or BinanceDEX. It is a decentralized exchange platform based on Binance’s blockchain. There is a lot of controversy when it comes to the true decentralization of the system. Indeed, the system is based on a relatively small number of nodes, although this is theoretically sufficient to speak of decentralization.
The black point of the project is mainly its operation in relation to the tokens of the blockchain. If you want to exchange Bitcoins on the platform, you have to send your Bitcoins to Binance, who will exchange them for Bitcoins.D. So it is too centralized an operation to really speak of decentralization: you just exchange tokens of a new type that are linked to Binance.
Compound is a loan making project on the Ethereum platform. Decentralized and usable by any Ethereum user, it allows owners of ethers or certain Ethereum tokens to earn interest by lending them to other users.
It thus also allows other users to borrow these goods, without having to negotiate the terms with a trusted third party. Unlike many Ethereum-based systems, Compound does not have associated tokens. They charge costs for every loan that is made through their system.
Argent is an Ethereum wallet which is available on smartphones. It has a very modern interface and user experience. If he’s on this list, it’s not just because of his qualities. Indeed, even if it has the objective of making the decentralized web more accessible, Argent does not only allow the storage and transfer of its ethers and other Ethereum tokens. It also gives you direct access to decentralized financial services.
The team has integrated services such as Compound or MakerDAO, which were presented earlier in the article, into the application. If you store ethers on the Silver wallet, you can very easily use them as collateral to get Dai or lend them to other users for interest. The use is very simple, you just need to select the token you want to lend, the amount and that’s it. A real lesson in user experience!
Monolith claims to be a decentralized alternative to banking services. Their services are based on the Ethereum platform, and therefore interact with the different tokens of the ecosystem. Like most DeFi mobile apps, the user experience and interface are taken care of.
The wallet is not custodial, it means that you are in full possession of your ethers and other tokens. The functionalities are similar to what can be found in FinTech, but for the Ethereum ecosystem. Monolitheven offers a Visa bank card, which allows you to spend cryptocurrencies at merchants. Note that the latter is only available to European residents and requires a KYC (Identity Verification).
After reading this article, you might agree with us that blockchain can have a huge impact on our lives. There is much more possible than most people think. The average person thinks that blockchain is only used for crypto, such as Bitcoin. That has long since ceased to be the case.
Decentralized Finance (DeFi) in particular will play a major role within the influence of blockchain. For example, it will be possible to lend money on the blockchain without too much effort. This makes it easier to finance your own project.
Perhaps the most remarkable thing is that real estate will also play a role on the blockchain. Real estate can be converted into a token that runs on the blockchain. This token is then shareable and for sale to everyone. It is therefore much easier to invest in real estate to earn a return with it, or to buy to live in it. This is a desirable solution for many people, especially in the current housing market.
Anyway, we will need a little more time before we know for sure how big blockchain is going to get. Blockchain is still fairly new, and it will take a few more years before it is developed enough to have a major impact on our lives.
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com