FTT DeFi launches on 12 July. A one-day show exploring the opportunities and challenges of decentralised finance in financial services. We will bring together the fast-growing ecosystem of providers and innovators, as well as established financial institutions.
But what is DeFi?
In the centralised financial system, which is where we (mostly) are today, the asset classes and processes are managed by people or companies. In decentralised finance these asset classes and processes are managed by a set of smart protocols, thus removing the need for a central authority.
Decentralised finance is a new and evolving concept which refers to financial services that are implemented on blockchain technology. Different blockchains can create different smart protocols or rules. The combination of existing blockchain-related technologies forms its infrastructure, which includes wallets, digital assets, smart contracts and oracles, to name a few.
Blockchains are based on distributed ledger technology (DLT). This technology underpins DeFi and creates a decentralised financial ecosystem, meaning the database exists (and is distributed) across many locations, as opposed to a central database that is set up in a single location and represents a single version of the truth. The decentralised ecosystem means that financial services and products can be offered without relying on intermediaries.
Decentralised finance presents possibilities for new financial infrastructures, economic activity and markets around the world, and challenges the prevailing orthodoxy. In the run up to FTT DeFi on 12th July, we consider some of the most impactful DeFi use cases within financial services, to date.
Why should the financial services industry care?
With the rise of gaming, the creator economy and the metaverse, Web3 is increasing in mainstream popularity. High-profile celebrities such as Paris Hilton, Justin Bieber, Mila Kunis, Steph Curry, Grimes, Snoop Dogg … the list goes on, are investing in and promoting blockchain-based applications.
Younger generations have grown up as technology-natives and have already started to utilise decentralised platforms, quickly becoming the majority group of consumers and creators. Therefore, it’s likely that adoption will accelerate.
We have also seen a growing number of institutional investors entering the DeFi industry and its market is expected to grow to $800 billion in 2022. The World Economic Forum has also predicted that 10% of global GDP could be stored on blockchain by 2025.
There has been a clear acceleration in the adoption decentralised finance and it doesn’t look to be slowing down. According to Gartner, Inc, 20% of large enterprises will use digital currencies by 2024. Decentralised finance has already starting to focus and disrupt traditional services such as lending, insurance, and asset management. Below, we explore some the key use cases for decentralised finance in 2022.
Supply chain and trade finance
One exciting use case for decentralised finance, and more specifically, smart contracts, would relate to supply chain and trade finance documentation. Smart contracts are self-executing programmable contracts that encode an agreement between two or more parties. The terms of a transaction are written as a protocol (governing rules on a blockchain).
Although we are already able to automate and streamline supply chain and trade finance documentation, it is difficult to digitise letters of credit and bills of lading due to the high chance of forgery.
Blockchain can provide secure receipts of transactions. We have seen examples of this, including Barclays and Wave who completed the world’s first blockchain trade finance transaction in 2016. More recently, blockchain has been explored as a solution to post-Brexit border digitisation in building supply chain trust.
Deploying a smart contract system helps monitor the loans of borrowers who can’t meet the stringent lending criteria of traditional financial institutions. A smart contract guarantees that terms and conditions are met. Borrowers who are not able to go to a bank for a loan can alternatively borrow directly from investors, as all the necessary measures are activated through the distributed ledger technology. This also shortens the time that it takes to receive a loan.
Bitcoin Suisse, a centralised crypto and financial services company has recently begun offering decentralised finance lending services to its clients. The offering includes smart contract interactions and system monitoring on the client’s behalf, as well as enabling them to post ETH (Ether) collateral in the protocol to mint and borrow the LUSD (Liquidity Dollar) stablecoin.
Crypto lending refers to a type of decentralised finance that allows investors to lend their cryptocurrencies to borrowers and, in exchange, receive interest payments, or “crypto dividends.” Other interesting uses cases lie in peer-to-peer lending and borrowing. There are a number of platforms which offer crypto lending, including Nexo, who recently partnered with Mastercard to launch the world’s first crypto-backed payment card. The card enables users to spend without having to sell their digital assets, and the assets can then be used as collateral to back the credit granted by Nexo.
Decentralised finance has given users more control over their assets. As more real-world assets are tokenised and placed on-chain, we will see fund managers increasingly include these in portfolios. We will also see a growing number of portfolios with a combination of real-world assets, digital assets, and tokens from chains other than Ethereum.
Crypto financial services company, Blockchain.com has announced plans to launch an asset management service that will cater to institutional investors and provide products to manage exposure to decentralised finance coins.
Financial institutions will need to engage or partner with underserved next-gen financial investors to get ahead of the DeFi curve or risk losing customers to new providers. Goldman Sachs announced it will facilitate client investment in digital assets including bitcoin, which is currently limited to its private wealth management clients worth $25m +. This could provide proof of concept for the wider wealth management sector.
Financial institutions will need (in short order) to look at asset management tools that simplify managing cryptocurrencies for the wider retail investment market. DeFi also allows customers to keep their data private, reducing the risk of fraud and the need to rely on intermediaries.
Insurance has appeared as another prominent use case for DeFi. Smart contract technologies could have a transformative effect on the insurance market and meet the global demand for transparent and automated insurance products. A smart contract could refer to an insurance contract that automatically pays out when certain, predefined conditions are satisfied.
Smart contracts remove the need for third parties and therefore make the insurance process secure, with quicker pay-outs and lower administration costs.
In addition, decentralised insurance protocols are being developed to provide a safety net for users in the crypto industry. DeFi insurance platform, Uno Re, has very recently launched its Cover Portal, which provides easy access to insurance so that DeFi users can insure their crypto assets in a few simple steps and protect themselves against hacks.
Coming soon – FTT DeFi
These are just some of the use cases that we are seeing in the DeFi space. The DeFi industry is in its infant stage, but it is clear that it will continue to grow at pace and continue to press on the future of financial services. The need to tackle some of the common challenges surrounding DeFi, which includes data protection, regulation, privacy and legacy infrastructure, before wider adoption can take place, is clear.
We will discuss the opportunities and challenges that lay ahead and take an in depth look at how the future of financial services industry will continue to unfold. Register now to join the conversation and our exciting community at FTT DeFi on 12th July at County Hall, Westminster.