Decentralized finance (Defi) is making a place for itself
Over the past decade, blockchains and cryptocurrencies have overcome one of the Internet’s major problems: exchanging value without a centralized trusted third party. With this breakthrough, entrepreneurs, engineers, and organizations are beginning to organize not only new services but also a new global financial infrastructure, free from information systems jealously guarded by historical intermediaries. This is the emergence of decentralized finance or Decentralized Finance (Defi).
It differs from the traditional financial system by three main characteristics: it is natively digital, opens to all, and operates on decentralized infrastructures. Concretely, the use of Defi makes it possible to benefit from financial services, usual or new, without the need for an account with a banking institution. Insurance, loan, investment ... The first bricks are already working and are brewing more and more money.
Traditional finance is already in the game
While the value involved in Defi at the start of the year was a few hundred million dollars, at the start of October it exceeded 10 billion dollars. With the enthusiasm, institutional investors are starting to take hold of the subject and mix it with their usual activities, in order to gain a competitive advantage as quickly as possible.
This hybridization between Defi and the traditional system is already taking shape, notably with the EMI license, allowing operation with traditional currencies, obtained by the "Aave" project in the United Kingdom. This company becomes the first “crypto-bank”, whose applications are directly on the blockchain. The United States is not left out: according to a study by asset manager Fidelity, as of June 2020, more than a third of American institutions, including pension funds, had exposure to cryptocurrencies. Major companies, such as MicroStrategy, or Square, a fintech valued over $ 80 billion, have bought for more than $ 400 and $ 50 million, respectively.
Mindsets are changing: companies like banks understand that the wave cannot be stopped and that it is better to ride it. If for the French authorities and banks, the story too often remains in the staple "blockchain good, cryptocurrency bad", the ecosystem is at the forefront. Many people work in the main Defi projects, including foreigners. Let us quote a few projects well-identified in the global ecosystem with the aggregator, which has just raised more than 2 million euros: Jarvis Network, allowing everyone to become a broker, Aleph, which works on interoperability in Defi, or Kleros, a private arbitration system for disputes in the digital space.
Defi is not necessarily better than the traditional system, however. Whatever its strengths, today it is in many ways less efficient, less mature, more difficult to use. All this is normal for a nascent ecosystem, and it would be a shame to repeat the same mistake an umpteenth time: to consider that this state of affairs is permanent and that because a nascent innovation is risky and imperfect, then it has no future. Decentralized finance or Defi offers new or traditional services such as loans, investment-yielding investments, or even insurance through blockchain technology. In a full boom, it opens a new horizon to the finance sector.
These decentralized technologies introduced by blockchain, cryptocurrencies, and smart contracts change codes, paradigms, opportunities, responsibilities, types of investments, rates of return, but also individual management of taxes and capital, and this on a large scale.
Decentralized finance (Defi) and impacts
Blockchain, the latest technological breakthrough, led to the creation of decentralized finance (Defi), an alternative ecosystem that destabilizes states as well as central banks and traditional banks. Digital currency changes the balance of power between states and turns upside down a world monetary order established since the end of the Second World War.
The birth of decentralized finance, a new “universal” non-discriminatory ecosystem
The latest in technological innovations is Defi (Decentralized Finance), a new financial ecosystem without intermediaries, based on Blockchain technology and cryptocurrencies, which is natively digital, based on decentralized infrastructures, and accessible to all, as well. in terms of use, consultation, and participation in its construction. Decentralized finance is presented as a "universal" and non-discriminatory ecosystem by its promoters, where everyone could benefit from financial services and products by freeing themselves from oversight bodies. It allows you to bypass the restrictions related to identity, border, or censorship issues that prevent access to banks. Thanks to the penetration of new technologies in contemporary society, Defi makes it possible to provide services to everyone, without any restriction.
Cryptocurrencies are initially seen as an asset
Despite the risks associated with significant price volatility, fraud, and cyber attacks, cryptocurrencies have gone from a niche investment stage in ten years to a trend that is becoming more widespread. They know a fairly wide distribution among the population rather as an asset at this stage than as a means of payment. In countries experiencing monetary economic crises, cryptocurrencies are a safe haven as was the case for Argentina, where the accounts have increased tenfold in a year, encompassing nearly 5% of the population.
Growing acceptability and use of cryptocurrencies boosted by fintech and digital industry
Digital players are interested in both the use of cryptocurrencies and Blockchain technologies, eBay is considering payment in cryptocurrency and is interested in NFT tokens, Nokia has just unveiled its Blockchain-based marketplace. The sector's innovation and financing ecosystem, for its part, continues to strengthen, the silicon valley venture capital firm a16z recently announced the creation of a new fund specializing in cryptocurrencies with a capitalization of $ 1 billion. The IPO of Coinbase, the cryptocurrency exchange was a resounding success with a first-day valuation that dethroned Facebook's record.
The decentralized architecture of Defi makes it possible to dispense with an intermediary and at the same time bypass current regulations such as the Foreign Account Tax Compliance Act (FATCA) American extraterritorial regulation which applies to banks and investment funds, or the LCB-FT for the fight against money laundering and the financing of terrorism, it, therefore, causes regulators to lose control over financial flows.
Faced with the volatility of cryptocurrencies, "stable coins" have emerged, they are cryptocurrencies backed by traditional currencies, allowing investors and traders to stabilize their earnings and avoid tax taxes. By becoming a commercial product that attempts to meet the needs of users in terms of speed, lower costs, and security of transactions, digital currency is changing the dynamics of power between citizens, the financial sector, and the state. The tipping of monetary creation in the hands of companies responding to private interests presents a real risk of substitution in the context of international financial and investment transactions and causes the state to lose control over monetary production. The growing attractiveness of digital currencies, as evidenced by the increase in trade volumes, threatens the monetary sovereignty of states.
Cryptocurrencies are also criticized for the energy consumption necessary for mining, since 2018 the subject of ecological cost has become unavoidable, several studies point to the ecological impact of blockchains. To these accusations, the promoters present mining as a means of promoting progress in energy efficiency by making renewable electricity projects profitable and by highlighting the share of renewable energies in the mining activity.
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