Nowadays, decentralised finance (DeFi) is becoming one of the leading narratives for promising blockchain use-cases. It is not surprising as more than 85% of all crypto currencies market cap is already allocated to coins and tokens representing an industry of decentralised finance.
In this article I will answer the following questions: what is the definition of decentralised (DeFi) finance, how the decentralised finance (DeFi) sector differs from the traditional finance sector and what are use-case of decentralised finance.
Definition of Decentralised Finance (DeFI)
I would define decentralised finance (DeFi) as an open financial sector that provides financial services using software that is built on top of public blockchains. The decentralised finance (DeFi) sector will see the future of financial services in a digital light, the same as traditional finance through financial technologies.
Both financial sectors aim to reinvent financial services as automated software products with programmed business logic.
Difference from Traditional Finance Sector
The decentralised finance sector differs from the traditional financial sector in two significant ways:
- The trust source of decentralised finance (DeFi) is public blockchains while the trust source of traditional finance is public governance frameworks composed of laws, licensed financial institutions and financial authorities.
- The decentralised finance (DeFi) sector is a more open system with almost no entry barriers as everybody who has programming skills can build financial services on top of public blockchains. In contrast, the tradition financial sector has massive entry barriers as it is necessary to get proper licenses from regulators to be allowed to provide financial services.
Use-cases of Decentralised Finance
The main use-case of decentralised financial (DeFi) sectors is to provide access to financial services in the areas where the traditional financial sector fails. I would identify four primary use-cases:
- The decentralised financial sector could be alternative financial service provider when the traditional financial sector faces trust crises like the 2008 banking crisis, hyperinflation, currency crisis or unexpected devaluations.
- The decentralised financial (DeFi) sector could be an innovation sandbox to provide financial services where traditional sector proves to be inefficient; for example, serving 2 billion unbanked people in the world or to provide cross border services (payments, loans, etc…).
- The decentralised financial (DeFi) sector could provide uncensored access to global financial services to circumvent bans or restrictions imposed by the traditional financial sector to users; for example capital outflow or foreign exchange controls imposed by local and federal governments.
- The decentralised financial (DeFi) sector could empower user financial creativity by providing tools to create financial products that, in traditional finance, is allowed only to licensed institutions; for example financial derivatives, futures, swaps, etc…
In my next article I will provide information on past and future of technological waves in the decentralised finance sector.
About the Author — Sandris Murins
I am the co-founder of Murin’s startups studio. We are helping to build crypto startups from scratch for investors, founders and for corporates. My mission is to put teams and investors into the best positions to capitalise on emerging opportunities at the intersection between crypto, decentralised finance and artificial intelligence.