We have the invention and evolution of technology to thank for some of humanity’s most significant advances. The invention of the telephone in 1876, the aeroplane in 1903, the computer in 1937, and the internet in 1974 all completely changed how we live our everyday lives. As technology advances, how can the likes of web3, the metaverse, blockchain and DeFi change the future of fintech?
This week, our coverage focuses on decentralised finance (DeFi), virtual assets and blockchain. Having learnt what makes DAO’s so powerful, we now hear from Spool, Gateway.fm, Core, Capco and CoinLoan Break on what the future of decentralised finance looks like.
Allocating and re-allocating capital
The demand for financial inclusion has caused many to look for solutions in new technologies. Philipp Zimmerer, core contributor and chief strategy officer at Spool, the DAO, explained how DeFi can have an impact by allocating and reallocating capital:
“Decentralised finance has one main superpower: the ability to globally allocate and re-allocate capital wherever it is most efficient at that time.
!In the future, meaningful investment opportunities will be visible, usable, and understandable to all thanks to live data feeds and no centralised middlemen.”
Bridging the gap between TradFi and DeFi
Cuautemoc Weber, co-founder and CEO of Gateway.fm, the decentralised blockchain infra/node provider broke down the different ways DeFi is already being used. In turn, he explains how these will create different possibilities for innovations in the future:
“The decentralised future of finance has several dimensions. Firstly, the proliferation of permissionless access to finance for anyone across the globe in a trustless manner – based on Satoshi Nakamoto‘s Bitcoin Whitepaper, the catalyst for this movement. A truly decentralised future of finance means no boundaries, no regulatory roadblocks impeding the exchange of value in the new era of the internet.
“Secondly, the future of financial markets viewed through the crypto lens will be about trust-lessness by means of immutable code. Blockchain allows these principles to play out in harmony with the initial vision of truly decentralised access to financial instruments. It enables the exchange of value in an anonymous and secure manner by anyone wishing to participate in this ecosystem.
“We’ve already seen a lot of experimentation across many assets, particularly around digital virtualisation by blockchain technology. It delivers a new breed of innovative and efficient solutions such as decentralised exchanges, trading of digital currencies, loans, borrowing, perpetuals, synthetics and with NFTs, the digitalisation of real-world assets with tokenised digital assets.
“Ultimately, the gap between traditional finance and decentralised finance will need to be bridged, requiring regulatory adaptation to provide a clear pathway for traditional institutions to get on board.”
Trust will lie in code rather than humans
At The Fintech Times, we have recently discussed the impact of replacing human contact with AI and other technology. While in the customer service sector, a human touch remains imperative, CJ Reim, contributor at Core DAO, the DeFi organisation, explains removing a human go-between will ease the problem of trust in DeFi:
“In a decentralised future of finance, trust will lie in code rather than humans. By removing human go-betweens, protocols can offer better services with less extraction, speedbumps, and the need for trust. Empowered with access to previously siloed financial instruments, every person with an internet connection can have true ownership of their financial assets and actions. Banks become just one option among many. Say goodbye to unworkable open hours and faulty service. Code doesn’t sleep, lie, or behave irrationally.
“With blockchain-based code, the use cases are nearly limitless. Opaque and arbitrary legal contracts become open and predictable smart contracts. Transactions through a third party become peer-to-peer swaps through decentralised exchanges. And siloed financial instruments become one system of interconnected protocols with each additional program building upon the last.”
Creating new opportunities through regulation
James Hiester, senior consultant at Capco, the financial services global management and technology consultancy, highlights the shortcomings the DeFi sector has experienced. Using these as examples, he explains what the sector must do to avoid such things from happening again:
“The ultimate vision for decentralised finance is to be fully digitised and automated via smart contracts. By improving the efficiency of traditional assets and opening the door to new alternative investments, DeFi will continue to create new opportunities across financial services.
“However, recent events such as the collapse of FTX demonstrate the need for the industry to address its shortcomings in terms of consumer protection and fraud. Moving forward, DeFi must embrace regulation. It must implement controls that bring it in line with the safeguards that govern traditional financial institutions. The advantage of DeFi is that it can do this in a digitally native way. Unencumbered by legacy systems and technical debt.
“For example, smart contracts can be enhanced to include automated Know Your Customer controls at the protocol level, leveraging historical blockchain data to track the source of funds. This convergence of governance and regulation alongside decentralisation is key to building a sustainable ecosystem. Consumers need institutions they can trust and steward them into this digital landscape.
“Governments and conservative financial institutions will continue to play a large role in a decentralised world by providing oversight and anchoring trust.
Creating better transparency and efficiency
Max Shilo, digital assets analyst at CoinLoan, the crypto lending platform, provided similar views to Reim. He explained how the future of DeFi will create a greater layer of trust for organisations:
“A decentralised future will operate on blockchain technology and it will do so without intermediaries, by peer-to-peer.
“No centralised institution, like banks, will have impact or influence on the transactions. Simply put, the main point of decentralised finance is no ‘middleman’.
“It can work in many ways like borrowing, lending, and making transactions (sending and receiving money).
“This will be happening through decentralised applications that are used to push transactions from a human to a human.
“Currently, we are using centralised applications or companies where the entity can block or freeze transactions. All the while making healthy profits from any transaction made.
“They can be removed through smart contracts that allow automated financial transactions to be executed automatically if certain criteria are met. Or through decentralised exchanges allowing users to exchange digital assets without intermediaries. They are transparent and can’t be controlled. They are simply a piece of code that can’t really be changed or influenced.
“Decentralised finance provides transparency as all the transactions are recorded on the blockchain and can be seen publicly.
“This increases transparency and reduces the risk of fraud, plus it eliminates potential fraud. As a result, a decentralised future has better transparency and efficiency. Furthermore, it also provides an extra layer of trust as the world slowly but surely moves towards decentralisation.”