Can DeFi Disrupt the Traditional Banking Business?
What is “DeFi” anyway?
DeFi is an umbrella term which stands for “decentralised finance”. It describes a variety of financial applications in the crypto-sphere built towards the aim of disrupting and replacing financial intermediaries such as banks. In a nutshell, DeFi users have the ability to transfer, trade, invest and borrow crypto-assets, all done via peer to peer using ‘smart contract’ functionalities. As of the beginning of 2020, the exponential growth of DeFi has exploded from a Total Value Locked (TVL) of US$0.7 billion to nearly US$60 billion at the time of writing.
The Nuts and Bolts of DeFi
Most DeFi applications (dApps) are currently built on top of the Ethereum and Binance blockchains. Cardano and Polkadot are two other fast-developing currencies with smart contract capabilities.
Alternative blockchains with smart contract technologies such as Cardano further reduce costs, increase speed and assist towards scalability since its programming language Plutus are more accessible for developers. In addition, the code builder initiative of Cardano’s Marlow will enable its users with no technical IT knowledge such as myself to build their own smart contacts! How cool is that?
Central and a critical component of any financial ecosystem is undoubtedly money. Whilst Bitcoin, the number one and king of cryptocurrency per se is decentralised, it is highly volatile and has limited programmable functionality. Stablecoins such as USDT and DAI counters this existing problem as they are pegged to the US dollar and are backed by crypto collateral that can be viewed publicly on the Ethereum blockchain.
As DAI is said to be over-collateralised, what that means is that even if the price of Ethereum becomes extremely volatile, the value of the locked Ethereum backing the DAI stablecoin in circulation will remain at 100%. This is how such stablecoins is deemed as a good form of money for DeFi services.
Finally, DeFi has been viewed as a method to increase financial transparency, reduce fees and counter financial discrimination.
Multiplier’s Multi-Chain Lend (MCL) Protocol
Protocols such as Multiplier’s Multi-Chain Lend (MCL) lending and borrowing platform allow its users to take on a role once exclusively occupied by financial institutions such as banks. Lenders on MCL typically receive an annual percentage yield (APY) in excess of 10%, with loans distributed through MCL’s in-house algorithms and obtained from a pool instead of being individually matched to a lender like traditional P2P lending methods.
The interest rate charged is set in accordance to the “utilisation rate” of the assets in a pool. If all existing crypto-assets in the MCL pool are used, the interest rate will be set high to entice other liquidity providers to deposit more capital. If nearly no assets in a pool are used, the interest rates will be low to entice more borrowing.
MCL v2 is expected to be released very soon. Do stay tuned to that!
Potential to Disrupt the Banks
A World bank study highlighted an estimated 1.7 billion adults without access to banking services. DeFi and protocols such as MCL are well-positioned to reach this untapped market. This is made possible with its permissionless and accessible capabilities from anywhere globally requiring just a device and an internet connection.
MCL provides a viable option for rural inhabitants who may also be excluded from traditional finance, or find it to be uneconomic to be ‘banked’ as we know it. DeFi in general can also offer seamless speed and scale, exemplified by the exponential growth in its TVL since the beginning of 2020.
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