Video: DeFi and regulated digital asset banking
DeFi, short for Decentralized Finance, has been creating a lot of buzz in the Blockchain community. Rather than decentralizing currency, for example through Bitcoin, DeFi’s objective is to decentralize other financial products and services. The aim of the initiative is to offer traditional and innovative financial services to everyone by creating an open financial ecosystem built on top of public Blockchains.
Having no central body, investors can track, manage and invest their funds without an intermediary. DeFi applications usually allow the users to be in full control of their funds and private keys without a trusted third-party. DeFi on public Blockchains can be used to re-build traditional financial use cases such as: trading, lending, investing, wealth management, insurance and many more. It also is efficient due to the absence of intermediation.
DeFi is based on Decentralized Applications (dApps) or protocols. A peer-to-peer financial network is created by running these dApps on a Blockchain, which are connected by smart contracts. For DeFi to be fully decentralized, the Blockchain itself must be decentralized too. True decentralization allows censorship resistance, worldwide participation regardless of social status, and does not include trusted third parties. Using Blockchains as technological infrastructure allows quick and low-cost transactions, the immutability of the financial contracts, as well as contract automation.
Despite being a very innovative and fascinating technology, it also has some downsides. Recently, a large attack on a series of DeFi protocols comprised a single atomic transaction, which was able to attack the network for a significant amount of cryptocurrency. The attacker was able to take out a large loan from a decentralized lending protocol, which was used to perform arbitrage across decentralized exchanges, and pay off the loan using the profits from the arbitrage. This all happened on a public Blockchain in a matter of seconds.
The benefit of a digital asset bank is security and trust. For every stable coin token it mints in its customer accounts, the equivalent in fiat currency is held as collateral in the national bank.
‘At Sygnum we are real proponents of DeFi, however we don’t think that it’s ready for mainstream adoption yet. As part of that, our stable coin will be a fiat-collateralized stable coin. Does that mean we won’t be looking at DeFi in the future? Of course not. We are open to supporting and creating decentralized finance protocols and projects, however we want to be able to do so in a regulated environment while keeping our clients’ funds safe’ says Gavin Pacini, Head Blockchain Engineering at Sygnum.