Beyond decentralised virtual currencies such as Bitcoin and Ethereum, blockchain technologies today also power Decentralised Finance (DeFi), a term used to describe financial services with no central authority. To put it simply, DeFi offers its users all the financial services offered by a traditional financial system that is centralised, but without banks or exchanges acting as intermediaries or overseers of all transactions.
Certain cryptocurrencies, usually stablecoins, are used in DeFi to create exchanges, lending services, insurance companies, and other organisations without any owner. In essence, where Bitcoin and other cryptocurrencies decentralised money, DeFi looks to decentralise the entire financial system as a whole. As such, DeFi is touted as the harbinger of an open economy, which is permissionless and hence, inclusive.
The DeFi infrastructure is built on Ethereum, a platform that can be used to write decentralised programs, also known as decentralised apps or Dapps. Ethereum can help users write automated or smart contracts, to manage any financial transactions in the DeFi space. In effect, users can determine the rules of how certain financial transactions will function. The catch being that the rules, once set, cannot be changed.
For a comprehensive understanding of DeFi and what it entails, one can refer to this explainer video.
Nischal Shetty, the founder and CEO of Mumbai-based cryptocurrency exchange platform WazirX said that one of the more tangible benefits of DeFi is that it furthers the scope of cryptocurrencies. “For a centralised crypto exchange like ours, you would have to register, fulfil your mandatory KYC (know your customer) requirements, deposit some amount in the exchange account before making a transaction. In a DeFi system though, all that goes out the door. In DeFi, you’re trading globally, without any KYC.”
In essence, while anonymity has always been of the unique features of cryptocurrencies, DeFi only furthers this essential feature associated with cryptocurrencies. And as with cryptocurrencies, DeFi is fraught with risks.
“It’s in its infancy and not very easy to use. Your crypto is not being managed by any exchange but yourself, so you have to be safe, or you could lose your crypto if you enter into the wrong places or transactions,” said Shetty.
The fact that DeFi enhances anonymity in transactions by eliminating the centralised crypto exchange and KYC requirements only amplifies the risk of cryptocurrencies being used for terror financing and other anti-social activities.
Nevertheless, one of the better use cases of DeFi is for lending and borrowing. Users can lend their crypto assets, and earn interest on them. Shetty points out that what makes lending crypto assets an attractive proposition, is the interest rates offered on one’s crypto assets in the DeFi space. “Currently, the interest rates offered by banks are measly, just around 2.5-3%. However, in DeFi, some protocols are offering 500-1,000% interest rate on an annual basis.”
Lending and borrowing in the DeFi space are facilitated through a Decentralised Exchange (DEX), of which, WazirX is the earliest proponent in India. The Binance-acquired crypto exchange is currently developing its own DEX platform.
A DEX is built on the Ethereum platform, requires no accounts, sign-ups, or ID verification and by extension, is completely autonomous and free for all. DEX doesn’t have a centralised exchange operator, but smart contracts which enforce the rules, execute trades and securely handle funds. A DEX doesn’t charge any withdrawal fees from its users.
Further, unlike in centralised exchanges, a DEX doesn’t require the users to deposit funds into an exchange account before conducting a trade. This eliminates a major risk associated with cryptocurrencies and centralised exchanges, of exchange hacking.
“If users feel that they don’t want to park their funds in a centralised exchange such as ours, they can opt for our DEX platform and make transactions without the mandatory registration requirements with our centralised exchange,” said Shetty.
As of June, the entire DeFi sector was valued at $1.05 Bn in total volume locked (TVL) in various cryptocurrencies including Bitcoin. Today, DeFi’s combined capitalisation across all cryptocurrencies stands at $8.57 Bn.
When asked whether developing its DEX platform was wise at a time when the Indian government has reportedly moved into inter-ministerial consultations for a blanket ban on all virtual currencies, Shetty’s reply was laced with cautious optimism. “I don’t think this ban will spring upon us. The monsoon session of the parliament has just begun and cryptocurrency ban doesn’t figure in the list of items tabled to be taken up during this session. We see no reason why the government will make this a surprise entry in this session.”
Shetty also offered his insights on the bill, “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019”. “If you read the bill, it is very vague. Cryptocurrencies and its various use cases aren’t even defined properly. It is unclear in the bill what virtual currencies are and their different types. We are working with the government to assuage their concerns about virtual currencies and their benefits for the Indian economy.”
Shetty added that the various crypto exchange platforms in India were also working together, under the aegis of the Internet and Mobile Association of India (IAMAI) to develop a code of conduct which all cryptocurrency exchanges in India would have to abide by.
“We don’t want to further the notion that because there is no regulation, all crypto exchanges have a free hand in India. We believe in self-regulation. Our code of conduct will be released in a month or so and all of us will abide by it,” he said.
Meanwhile, by the time of writing, Bitcoin was trading at $10,879, a marginal increase from last week’s price of $10,825. Bitcoin’s market cap was around $200.6 Bn.
Ethereum was trading at $370, an increase of around 9% from last week’s price of around $338. Ethereum’s market cap was around $41 Bn.
Over $1 Bn In Bitcoin Tokenised For DeFi
Less than four months ago, in June, the total value locked in DeFi stood at $1.05 Bn. Today, more than $1 Bn in Bitcoin alone, has been tokenised to access Decentralised Finance products on the Ethereum network. Bitcoin makes up more than 12% of the DeFi sector’s $8.57 billion combined capitalisation. From June, the share of DeFi’s capitalisation represented by Bitcoin has increased by more than 150%. The increase in Bitcoin value on Ethereum network for DeFi purposes highlights the increased propensity of users to generate passive returns on their crypto assets. You can read the entire story here.
DAPPS Can Send Push Notifications To Ethereum Wallet Users
Decentralised applications (Dapps) on the DeFi network will soon be able to send push notifications to Ethereum wallet users. While most smartphone applications send push notifications to users whenever an action or response is required from them, Dapps in the DeFi space don’t offer that feature. This is the problem that Richa Joshi, the founder of Ethereum Push Notification Service (EPNS) is trying to solve.