‘‘Decentralized finance is the concept of decentralization through cryptocurrencies, applied to the mechanisms of finance”
Offering financial products or financing solutions today requires applying for authorisation as a credit institution from the ACPR and the Banque de France, having several million euros in capital and being able to rely on both patience and solid legal support.
The emergence of decentralised platforms
Une alternative est cependant en train d’émerger, beaucoup plus aisée et moins coûteuse : les plateformes décentralisées. De même que Uber ne possède pas de flotte de véhicule ou Airbnb de parc immobilier, ces plateformes d’un nouveau type peuvent se mettre en place sans mobiliser un capital équivalent à l’offre existante, ni s’astreindre à des régulations contraignantes.
Since 2018, we observed the emergence of the Decentralised Finance or #DeFI, whose foundation is MakerDAO’s stablecoin DAI, a cryptocurrency with properties close to fiatcurrencies.
Free competition and its consequences
The benefits of using DAI for borrowers were described in our article on MakerDAO. Several platforms now allow everyone to get loans, based on the principles of over-collateralisation and automated liquidation. The lender receives a remuneration.
As mentioned in one of our articles, centralised marketplaces such as Poloniex or Bitfinex offered between 0.5 and 3% remuneration for the lender, with high risks of payment default, platform hacks (Poloniex in 2014, Bitfinex in 2016) and cryptoassets volatility.
When everyone is a bank, banks no longer exist
The emergence of new decentralised finance platforms has boosted lenders’ remuneration by making available the DAI stablecoin and offering rates of remuneration between 4% on compound.finance and 16% on Nuo.network.
These platforms even allow the use of assets other than ETH in security deposit: nine assets including two stablecoins (DAI, USDC) are available on Nuo.network and, if only five are compatible with Compound.finance (ETH, BAT, ZRX, DAI, REP), the next update of the platform will make compatible about thirty of them.
MakerDAO: the primary market
MakerDAO will not stand still, since the next update of the so-called “MCD” protocol for Multi-Collateral DAI is planned before 2020. It will add other types of assets as possible deposits to the DAI generation. This technical update was published on the Ethereum test network and is therefore preparing to go into production under real market conditions.
MakerDAO is positioned as the primary market for monetary issuance and neo-platforms take the place of a secondary market for making this money supply available. This is reminiscent of the functioning of a central bank and commercial banks, with these new players replicating elements known to the financial world.
The classic model based on trusted intermediaries, adding friction and driving costs upwards can now be described as fiduciary finance and contrasted with a new model: the decentralized finance. The purpose is not to reinvent the wheel of the financial markets but to provide a new kind of offer, strengthened and optimised without third-parties.