Friday, March 29, 2024 | Ramadan 18, 1445 H
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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

New stage of maturity for Decentralised Finance

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When Bitcoin’s white paper was released by the pseudonymous Satoshi Nakamoto more than 12 years ago (yes, it has been that long ago!) an important cornerstone brick was laid. That was something that is now known as DeFi: Decentralised Finance.


In the mind of Bitcoin’s founder, the idea was to provide everyone in the world with access to a currency independent from centralised authorities such as banks and other financial institutions.


Through a complex cryptographic system based on SHA 256, each crypto holder would have been able to hold one or more digital wallets, where the cryptocurrencies held were “truly owned” by the holder, with no third party custody or intermediation.


Obviously that came with pros and cons. One being that if the cryptography key needed to access the wallet is lost, all funds are lost. Something that would never happen with a bank.


Then, roughly 5 years later, Vitalik Buterin launched Ethereum, a step up in the game, as it did not only came with a cryptocurrency, but an entire ecosystem — based on smart contracts — where anyone could have created a new cryptocurrency, but also additional programs known as Dapps (short for decentralised apps).


Many other cryptocurrencies were launched in the years to come. It became so easy to launch a cryptocurrency, that there were literally tens of thousands in existence.


Many became worthless in a short period of time. With so much diversification in the offering, the demand of investors was distributed oddly on a handful of currency growing exponentially, while others dropped to near-zero value.


The excitement about blockchain seems to follow a 2 to 3 years cycles, but every time it seems to grow significantly, both in value as well as in number of milestone projects launched to pave the road for the next wave.


In the most recent wave, besides the mere face value of a cryptocurrency, what happened in the background represented a true financial revolution: the inception of DeFi, the decentralised finance.


While previously large players stepped in as centralised crypto exchange — thus mimicking the traditional financial ecosystem —in the past couple of year there has been a solid move towards truly decentralised exchanges: DEX. Such exchanges offer “swap” systems where cryptocurrencies can be paired and used as collateral for other stable coins which, being pegged to real word assets or fiat currency, maintain a constant value.


Cryptocurrencies are known for being really unstable. This is system has drastically reduced the risk of extreme fluctuation in value and opened potential for more services offered on blockchain.


2020 was the year during which those who believed in a parallel financial ecosystem, entirely based on blockchain, rejoiced the most. In fact, crypto-lending and crypto-insurance became a reality.


It was a major step towards a vision of a new DeFi ecosystem, where the exchange of value does not need to go through centralised financial institutions. But do banks need to fear such progress towards DeFi? Not for now, in my humble opinion. Technology is still hard to use and there are not enough players in the market.


I could imagine DeFi being much more prominent in 5 years from now, but for the time being it is just an interesting technology with a large potential.


[The columnist is a member of the International Press Association]



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