What’s next for DeFi?

DeFi is one of the hottest topics in the finance space right now and for good reason. It is happening now.

So the burning question is not if – but when – will DeFi disrupt traditional markets?

But there are many more ‘how’ questions:

• How might decentralized exchanges disrupt legacy market structures? (DeFi has the potential to be far more consequential than the impact of the arrival of electronic trading).
• How will DeFi alter money markets given its power to deliver algorithmically derived interest rates based on supply and demand? (As opposed to being decided by traditional bank committee as today.)
• How would the S&P 500 Index look if it were linked to a public blockchain such as Ethereum? (This may not yet be a reality but a token-derivative market like this could theoretically exist in the near future.)
• How might the radical shift in the distribution structure brought about by DeFi mean a rethinking of how financial products and services are regulated? (Particularly since current bank regulations exist mainly to prevent human failings.) 
• How might DeFi impact the jobs of the usual middlemen in banks and brokerages. (Certainly, they have good reason to be afraid!).

But first, what is DeFi or decentralized finance? DeFi is short for “decentralized finance”. It is an umbrella term for the mix of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries. Collectively, this ecosystem is known as ‘open finance’. Or as Investopedia puts it: “In its simplest form, decentralized finance is a system by which financial products become available on a public decentralized blockchain network, making them open to anyone to use, rather than going through middlemen like banks or brokerages.” The first description, using the term ‘disrupting’ is probably the most accurate.

DeFi leverages blockchain technology to deliver services with no human intermediation. Other DeFi projects could be decentralised exchanges that allow users to trade without any need for a broker, loan officers or credit committees. Block.one: a great leap for DeFi In May this year, DeFi took a giant leap forward when it was announced that billionaires Peter Thiel, Louis Bacon and Alan Howard would be backing a new $10bn cryptocurrency asset exchange. The exchange, Block.one, will be anchored in decentralised finance, radically reshaping trading and investment in digital assets.

How will it work? Firstly there will be no traditional market maker to persuade buyers and sellers to trade on exchanges. Secondly, investors will have the freedom to deposit their own assets into a smart contract by which automated computer code will handle buying and selling with interested parties, as well as performing settlement and clearing. Is now a Kodak moment for banking? The finance world is seeing a tidal wave of interest in DeFi.

The huge success of the largest decentralized exchange in the world, Uniswap, has shown its potential. Add to that the success of others in the crypto space, such as PancakeSwap, SushiSwap and 1Inch Exchange, it is clear that DeFi is not just a trend, but an evolution. The involvement of the European Investment Bank has only served to hammer this home. It generated excitement in the cryptocurrency community at the end of April when it used the Ethereum blockchain network to issue a €100 million ($121 million) two-year bond. Even if the DeFi market is small compared to traditional finance, it is developing fast. JPMorgan reports that the DeFi market has grown from about $15bn to $65bn. That’s just since the start of this year. The DeFi revolution is here and the likes of Wall Street and the big banking institutions will not be able its impact for much longer. DeFi’s drumbeat is growing ever louder.