How is Decentralized Finance Reshaping the Trade Finance Sector?

The Crypto industry has been observing multi-dimensional growth ever since the launch of Bitcoin in 2009. People from all sectors have started participating in the innumerable opportunities this industry has provided them with. Cryptocurrencies, smart contracts, blockchain are household names now in 2021.

Further, with the introduction of programmable smart contracts, the blockchain ecosystem has grown into a borderless and permissionless landscape that allows a diverse set of Decentralised Apps (dApps) to run in parallel.

The first generation of decentralized applications focused on creating digital tokens and tracking their ownership. The latest generation of dApps, on the other hand, has progressed beyond ownership to include innovative administration and transfer mechanisms that resemble and expand on current traditional financial products. This parallel financial system, known as Decentralized Finance (DeFi), is made up of decentralized exchanges, collateralized loans, lending and borrowing platforms, leveraged trading, synthetic assets, prediction markets, payment networks, and much more.

This article focuses on the characteristics of DeFi, but before that, let’s find out how the assets associated with DeFi are managed using tokenization.

Asset Tokenization

On a blockchain network, tokenization is the process of creating, issuing, and managing digital assets. Because any asset can be tokenized and kept on a blockchain, it effectively creates a new economic system. Tokenization is also the adding of new assets to a blockchain, and a token is the blockchain representation of that asset. It aims to make assets more accessible and transactions more efficient in general. Tokenized assets, for example, may be simply and quickly transferred from and to anyone in the globe. They can be stored in smart contracts and used in a variety of decentralized applications. As a result, these tokens are critical to the DeFi ecosystem.

In September 2021, the hybrid blockchain network that is expanding rapidly into the DeFi domain, XinFin announced its partnership with BIGG Digital Assets Inc. Lance Morgan, President, Blockchain Intelligence Group, explained how Blockchain Intelligence Group, a global developer of blockchain technology, and XinFin together are looking forward to benefiting from blockchain, crypto, and tokenization adoption. Within legal limitations, XinFin is employing the XDC Network to provide real-world decentralized finance (DeFi) via tokenized trade finance assets and non-fungible tokens (NFT).

Characteristics of DeFi

Traditional centralized financial services require ‘paper promises’ based on financial contracts between the two parties, which are intrinsically permissioned to develop upon. As the access can be canceled anytime, it makes developers vary to create new applications. The central organization now controls important aspects of the application, casting doubt on the deterministic guarantees sought by the third-party developer.

DeFi flips this dynamic on its head by being intrinsically permissionless, offering an open basis. From this, any developer can have immediate access to tamper-resistant and dependable financial infrastructure. This makes it possible to create genuinely impartial and deterministic applications that run as coded and cannot be turned down. Connecting to DeFi infrastructure does not require permission from the original developers, allowing for smooth innovation.

2. Programmable and Composable

The underlying source code for DeFi protocols is widely available, and a public application programming interface (API) enables service composability. Participants can inspect and evaluate protocols directly, as well as fork code, i.e, take the source code and establish an independent development. They can also create derivative or competitor services, thanks to the widespread use of open-source code. It also allows for programmability, which enables dynamically customizing and extending financial instruments.

Composability refers to the ability to mix these programming components to produce financial instruments and services, including ones that include several DeFi services and protocols.

A stablecoin, for example, might be used as the basis for a derivative that is used as collateral on a loan and is covered by an insurance contract.

3. Trust minimized operations:

Transactions are executed and recorded according to the clear logic of a DeFi protocol’s preset rules on a permissionless basis. Transactions do not require faith in the counterparty or a third-party mediator, because they are available through a decentralized platform. DeFi initiatives are often built on public, permissionless blockchains, albeit the platforms vary.

4. Non-Custodial Design

Non-custodial design means that assets issued or maintained by DeFi services, including those providing intermediation and other services, cannot be unilaterally expropriated or altered by anyone other than the account owner. Only the clear logic of their smart contracts and the applicable DeFi protocols apply to these tokens.

5. Transparency

Because DeFi products are built on open-source technology, every transaction and interaction between users and dApps is recorded in an open, immutable ledger dispersed around the world, they are transparent by default.

This transparency and decentralization of data have inherently given the users an unprecedented amount of data to analyze. With access to these insights, users can now make decisions based on thorough analysis, discover new opportunities, and adopt tactics to manage risks. DeFi projects like DeFi Pulse and CoDeFi Data are delivering a lot of value in terms of analytics and risk management.

DeFi is growing

Let’s take a look at some of the statistics of the past years.

According to DeFi Pulse, since December 2019, the total value locked in decentralized finance has surged by almost 100x. In December 2019, an estimate of $9.3 billion value was locked in DeFi. By December 2020, the value had risen to $25.2 billion and by December 2021, the value now is $98.6 billion. People have started looking at DeFi as a sustainable new technology and it’s showing.

According to IDC, global blockchain spending has increased 7x just in the past 4 years. Regardless of the stats, young promising entrepreneurs are also in agreement that DeFi is the future.

With all this in mind, it’s safe to say we’re entering the era of decentralization, and the only way is forward.

Further Readings:

https://medium.com/yodaplus/everything-you-need-to-know-about-decentralized-finance-f5d03e7359aa

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