Lesson 12: DeFi - financial services under the blockchain umbrella

The DeFi movement promises to transfer traditional financial products and services to the world of blockchain technology, able to carry out transactions in principle without the need for centralized intermediaries, such as banks or government agencies, and where the ultimate authority is the user, whether a private individual, the owner of a business or a company.

DeFi is an emerging financial technology that allows transfers of funds or loans through “financial contracts in blockchain support or form, and therefore recorded in an immutable blockchain", so says Javier W. Ibáñez, PhD in Law and Director of the FinTech Legal Observatory. According to the World Economic Forum, DeFi aims to “rebuild and reinvent financial services”.

Using smart contracts, DeFi is automatic: executed autonomously without the need for orders and intermediaries once certain conditions are met. Blockchain technology would provide transaction security and transparency. 

Although the main purpose of this financial technology is to empower users to manage their money and investments through digital wallets and services, DeFi can also create great opportunities for financial institutions through reliable regulation.

At the end of July, it emerged that the Bank of Italy (Italy's central bank) is going to promote an “institutional DeFi ecosystem test for security tokens”. Milano Hub, the central bank's innovation hub, has chosen Polygon - a protocol to build and connect Ethereum blockchain networks - for this initiative.

Until now, decentralized finance has not been subject to specific cryptoregulation, and may suffer from the instability of digital structures or different types of fraud.

Which new sectors will be created with DeFi, or which consolidated sectors will be transformed by it?

• Peer-to-peer loans and credits. As with offline or digital but without cryptography, but adding this layer of security, users can lend funds to each other.
• Decentralized exchange (DEX) of assets. Individuals can buy and sell cryptocurrencies and other digital tokens with users, organizations or directly in open markets.
• Savings systems. Within DeFi, it will be possible to deposit funds in protocols that offer returns for participating in the network or giving liquidity to the markets, due to the decentralized way in which they operate.
• Insurance contract. There will also be a market for insurers who provide protection against the risks associated with blockchain, from theft and hacking to technical errors.
• DeFi aggregation services. Within this ecosystem, it is possible to develop the equivalent to a centralized banking panel, so users can see everything at a glance.
• Aggregation of opportunities. At the same time, these panels will allow the optimal construction of interfaces, portfolios and (also automatic) approval of new opportunities and markets.

In the future, there are proposals such as DeFi social networks for developers, early adopters, and companies, and even gamified processes for promoting these tools. The essential regulation of these systems will be a turning point for widespread adoption.