DeFi Industry Report Primer
Fintech

A Beginner’s Guide to Decentralized Finance (DeFi)

Keeping up-to-date is a good way to explore the cryptocurrency market and consider options. A new realm of technology to consider is decentralized finance (DeFi).

DeFi is technology that merges blockchain, digital assets, and financial services. The market for DeFi started growing rapidly from $1 billion in 2019 to over $15 billion by the end of 2020.

Here’s a deeper look at how DeFi covers a wide range of business interactions.


What are Smart Contracts?

A smart contract is a blockchain-based software code that executes, controls and documents contractual business agreements when predetermined conditions are met. Smart contracts, which are based on the “if/then” principle, have been used for various business interactions, including regulating workflows and issuing automated payments when an assignment is completed.

Smart Contract Example:

Jen is a photographer who does remote freelance high-resolution photography for client websites. She agrees to a smart contract that will issue her payment once she completes the assignment. Jen is to upload a series of pictures to her client’s website. The smart contract only executes when all conditions are met, such as submitting the photos by a deadline.

She is paid for her services in cryptocurrency that transfers to her digital wallet and she is issued a virtual receipt. She can access these digital items with any computing device using an encryption key, which is a complex scrambled code generated by an algorithm.

Once the conditions are met according to the predetermined rules, the smart contract expires. Everyone in the network can verify from the blockchain ledger. Jen can trade her cryptocurrency for cash through a crypto exchange.


How DeFi Differs from Traditional Finance

While blockchain is a decentralized mechanism for financial processes, traditional financial institutions connect with the central banking system. Unlike conventional financial services, decentralized finance doesn’t require a bank as a mediator to monitor transactions.

Here are some key advantages to DeFi that differentiates it from regular financial services:

  • Autonomous transactions don’t require permissions
  • Deals can be arranged or completed without a waiting period
  • No hidden fees
  • Trust in blockchain as secure technology for transactions
  • Cryptocurrency transactions are facilitated
  • Digital cash is held in a digital wallet instead of a third-party bank
  • Public blockchain ledger allows for transparency
  • More seamless integration of services via a blockchain

One thing that makes traditional finance and DeFi similar is they are both vulnerable to cybersecurity breaches. Blockchain is considered to provide strong security through encryption, but nothing is bulletproof for the most sophisticated hackers.


DeFi Building Blocks

Main Components

The three main building blocks of DeFi are blockchain, digital assets, and digital wallets. Smart contracts connect all these components together. Other important DeFi terms to remember are stablecoins (digital assets), exchanges, and derivatives. More familiar financial terms such as credit, insurance, and asset management are also part of the DeFi lexicon.

Here are other important elements of DeFi:

  • Decentralized apps (Dapps) – Software apps based on smart contracts
  • Governance Systems – Software-based tools for altering smart contracts or blockchain protocols
  • Decentralized Autonomous Organizations (DAOs) – Entities using smart contracts
  • Oracles – Data feeds such as real-time stock price quotes


Why Blockchain is Entering Financial Services

Blockchain, the underlying technology behind Bitcoin and other cryptocurrencies, is gaining favor with FinTech companies for secure digital transactions. It facilitates DeFi in various ways, providing a decentralized environment while permanently documenting transactions.

Both DeFi and blockchain are innovations designed to increase transparency, convenience, efficiency, and accuracy of transactions.

Since both DeFi and blockchain are relatively new developments, they pose risks and unknowns that must be addressed by vendors and end-users. Both have been used for fraud. There are many hurdles and government red tape to overcome before these advancements become mainstream.


DeFi Service Categories

Stablecoins

Stablecoins are one of six key DeFi service categories as they represent risk management for cryptocurrency users. One of the main risks of using bitcoin or other cryptocurrencies is price volatility.

The value of one bitcoin can fluctuate wildly day to day, even within the same day. But the value of a stablecoin is fixed to match the underlying value of an asset such as fiat currency. In other words, stablecoins hold a steady value, unlike bitcoin.

Exchanges

A digital currency exchange (DCE) allows you to trade digital assets, such as buying or selling bitcoin. It also lets you exchange cryptocurrency for fiat currency or trade different types of cryptocurrency (e.g. Etherium and Solana). Current popular DCEs include Coinbase and Binance.

Credit

DeFi allows you to loan or borrow cryptocurrency with others. That’s one of the countless reasons why blockchain-based applications are rising in demand among FinTech companies. Users can also lend or borrow tokens, which are similar to digital coins tied to monetary value.

As with traditional credit, DeFi lenders earn interest from parties that borrow from them. In the DeFi ecosystem, anyone can be a lender, and crypto assets can be used as collateral for crypto loans.

Derivatives

This term rose to notoriety during the financial collapse of 2008. Derivatives are synthetic financial instruments in which the value is tied to how an underlying asset performs in the market. An example would be if an investment firm invests in real estate assets. At the same time, the firm is hedging against them with a derivative that reflects the inverse of the investment.

Derivatives exist in the form of futures and options contracts, credit default swaps, and a long list of specialized financial instruments that deliver value according to an algorithm that tracks market activity.

In the crypto world, various derivatives exist as well. For instance, a 3x BTCUP token. This token reflects three times the percentage gain or loss of Bitcoin in a day. So if Bitcoin goes up 3 percent in a day, the value of your token will increase by nine times.

Many other functions and algorithms exist for crypto derivatives.

Insurance

The age of DeFi insurance is in its infancy, but it’s currently being explored by the insurance industry. Insurers are interested in serving crypto investors due to the risk/reward dynamic. They can sell insurance coverage to crypto investors through risk tokens. These tokens protect against the volatility of crypto assets. Ultimately, DeFi facilitates self-insurance options.

Asset Management

Another way DeFi is disrupting the financial services industry is through active decentralized asset management. Users of DeFi asset management don’t need to open a crypto account. While keeping crypto in a digital wallet does not earn any interest, crypto traders can use wallets, exchanges, and blockchain to manage and grow their assets.

Transparency and decentralization are keys that make DeFi asset management attractive to crypto investors.


Conclusion

The advent of decentralized finance is creating disruptions and innovations in the financial services industry and beyond. In many ways, this wave of blockchain technology and associated applications is redefining how people view money.

DeFi empowers you to make seamless private transactions without conventional institutions looking over your shoulder. Looking forward, the products and tools that emerge from the DeFi ecosystem will help democratize access to financial services. Essentially, by creating new ways to monitor, deploy, and manage capital, individuals will gain more freedom, flexibility, and control over their assets.

Watch the recording of our Smart Money 4.0 webinar to learn more about decentralized finance.


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Smart Technology Fintech
Fintech

Entering the New World of Smart Technology in Fintech

Fintech, which some professionals express as “FinTech,” is short for financial technology. It’s a term that reflects new innovations in facilitating monetary activities used by businesses, investors, and consumers. This emerging technology is considered disruptive because it competes with traditional methods of delivering financial services. Here are essential points to know about how smart technology in Fintech is changing financial processes.


What Fintech Means

The financial industry has seen significant changes from technological advancements over the last century:

  • The telegraph and telephone allowed stock purchases across international borders.
  • The shift from analog to digital moved consumers from cash and paper checks to cards.
  • ATMs and online banking removed the need for tellers and enabled access to financial services from home.

The recent introduction of distributed ledger technology and crypto is ushering in yet another shift in the financial industry. Fiat money and traditional loans are being replaced by decentralized digital currencies and peer-to-peer lending solutions that are faster, cheaper, and more accessible to consumers and investors.

It’s important to note at this time Fintech has a very wide definition that encompasses any new digital technology that improves financial services. It typically involves solutions that are customized for a specific purpose with the intention of enhancing a company’s business model. Mobile devices are vital to Fintech solutions, allowing users to make transactions from any location at any time.

One of the most popular examples of a Fintech company is PayPal, which has been around for over two decades. PayPal introduced consumers to digital cash, creating new conveniences beyond ATMs. Some of the most essential functions of Fintech involve the ability to automate investments, banking, and risk management strategies. Not all traditional financial institutions have adopted this new paradigm, but more forward-thinking banks have embraced it.

Firstmac is a Fintech company based in Australia with the goal of competing with traditional banks by providing more affordable loans with lower interest rates. Based on smart technology, the firm can provide the same services that major conventional lenders provide, but at lower costs. Most of today’s Fintech companies are based in Asia, although the number of players is growing in the United States.


Advantages for Small Businesses to Embrace Fintech

Fintech startups typically begin with high upfront costs then lower costs for growing a customer base. The technology has experienced the most growth in China and India, as up to 80 percent of Chinese consumers have adopted at least one Fintech service to make mobile transactions. Many consumers around the globe embrace these services to either save or invest cash.

If you can afford building a business based on smart technology in Fintech, you should look into the following cutting-edge technologies that are part of the disruption:

Blockchain – This digital storage and cybersecurity technology has been around for over a decade. It allows for private parties to make secure online transactions that are displayed on a public ledger while the private details must be unlocked with an encryption key. Blockchain is used for cryptocurrency trading, but it can also be utilized to improve many traditional financial processes.
Internet of Things (IoT) – Wireless sensors placed in objects can transmit data through the internet at rapid speed. IoT devices are now the key to delivering streams of real-time data about system processes to analysts. The more IoT devices used in a utility or manufacturing plant, the more the organization can pinpoint waste and make real-time adjustments.
Augmented Reality – As a subset of artificial intelligence, AR mixes the physical and digital worlds to provide data and image overlays on top of screen viewing. Innovative financial firms are providing 3D virtual experiences with modern workstations. This effect makes it quicker to sort and comprehend financial data. The combination of AR and automation software can boost financial accuracy and business productivity.

Be aware that the current broad definition of Fintech includes software, services, and companies that provide new technology to improve financial processes. Overall, Fintech equates to game-changing financial technology that contributes to cost efficiency.

The increase in fintech products and services will be a driving force of transformation in the financial industry over the next decade. Startups and businesses that embrace these technologies will have a chance to outshine competitors and capture a new and growing market of tech savvy investors and consumers.


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Crypto Investing
Fintech

Risks and Benefits of Investing in Crypto

The term “cryptocurrency” has gained increasing attention in recent years due to its digital convenience and potential for growing assets. One of the first questions an investor should ask is: how safe is a crypto investment? Is it a trend or is it here to stay? Other questions surround how much money it can make in a short time.


Rising Demand for Cryptocurrency

Before diving into crypto, it’s helpful to investigate its short history. If you bought one Bitcoin in 2011 for $1 then forgot about it, today your digital wallet could pay for a downpayment on a home. At one point in 2021, you could’ve bought one Bitcoin for $30,000 then doubled your money by November. Bitcoin’s rapid rise to fortune triggered the rise in other cryptocurrencies such as Etherium.

The popularity of Bitcoin and other cryptocurrencies is driven by:

  • Scarcity, since only 21 million Bitcoins will ever be mined
  • Cost of creating the digital coin that requires massive computing power
  • Diverse utility of its underlying blockchain technology

Cryptocurrency has gained notoriety as a ransom payment to cybercriminals to unlock frozen digital assets. But on its brighter side, cryptocurrency is used as a seamless solution for digital transactions. A growing wave of large national brands, such as PayPal, have started accepting cryptocurrency. A big part of the optimism fueling crypto is that it’s used outside the traditional banking system. That means you can make online transactions directly without the need for a third-party financial institution.


Risk Management Strategies for Crypto

Even though you could have doubled your money in Bitcoin, you could have also lost half your money in the same year. It’s an extremely volatile asset due to daily news about whether or not it needs government regulations. One day it appears to be like a wild west gold rush, and the next there’s a scare that bankers and governments will take control of it.

Some of the forecasts about crypto have been absurd, as even financial professionals have predicted Bitcoin to surpass $100,000 in 2021. Due to crypto’s massive growth in value in recent years, it’s attracting many young investors who may not know about the history of bubbles. The dotcom bubble of the 90s, for example, was a fakeout frenzy in which even seasoned investors fell for the notion that any new website with a good idea was “going to the moon.”

Be aware that despite talk of blockchain technology being more secure than other forms of cybersecurity, hackers can still get into your digital wallet and steal your money. Exchanges that handle crypto transactions such as Coinbase and Gemini don’t have the track records that traditional broker/dealers do to assess online security. Another critical issue to remember is if you lose your private key to your digital wallet, you won’t be able to access your money in it – perhaps ever again.

Professor of Finance Robert R. Johnson, PhD, at Creighton University says no one should think about crypto as an investment for these reasons. Warren Buffett’s partner Charlie Munger, one of the most successful investors of all time, is also against crypto investing. Fans of crypto, however, point to its enthusiastic support from Tesla founder Elon Musk, who has at times been the richest person on earth.


Conclusion

Cryptocurrency is still in its infancy, which means it can grow to become an even more amazing asset in the future. But due to its short history, it’s unclear if crypto has already made its big splash and whether government will continue allowing it to be a decentralized currency. But making a crypto investment that grows exponentially can be the key to expanding investment capital in the future. For now, stay up to date with information on the world of cryptocurrency and how it’s transforming business.


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FinTech
Fintech

Trends in FinTech That Are Here to Stay

Long-term FinTech trends will generate real value, rather than perceived value. Here’s an example of something that generates wealth without value: a pyramid scheme. But pyramid schemes implode under their own volition, and people lose lots of money. Bernie Madoff made off with billions from a pyramid scheme; but he went to jail, and what money he stole is no longer his.

Many schemes generate wealth without value; but at their height, they implode. In contrast, that which generates true value launches from a firm foundation. That foundation is something which legitimately contributes to society. Here, we’ll focus on FinTech trends poised to pass the test of time owing to inherent value.


Barring End-of-the-World Scenarios, Digital Banking Remains

Digital banking brings countries, corporations, and people together conveniently. You can transfer substantial funds between banks in different regions via smartphone. Sure, the technology involved is a bit complex; but it’s the difference between spending a half-hour driving to and from the bank, and spending ten minutes taking pictures with your smartphone. This tech is increasingly convenient and represents one of the strongest fintech trends to invest in for upgrading operational tech and exploring new developments.


Blockchain Tech Has Value in Facilitating Easier Transactions

Blockchain is the engine of cryptocurrency. Also, it can make many big-ticket transactions easier. However, there is a learning curve regarding setting up a bitcoin wallet and understanding how to deposit and withdraw funds. Once that’s done, transferring assets is as simple as a few clicks of a mouse.

The value of cryptocurrency and blockchain generally has more to do with simplifying transactions than involved technology. Blockchain is revolutionary as a fintech trend; in fact, you might call it the trend–but its value is abstract and collateral. The real reason blockchain tech is valuable is because it decentralizes banking and facilitates easier transactions both locally and internationally.


RPA, AI, and ML: Hefty Potential, Though a Mild Risk

Robotic Processing Automation, Artificial Intelligence, and Machine Learning are RPA, AI, and ML. RPA saves time and money by expediting tasks that can be automated. AI and ML increase RPA effectiveness collaterally. AI in the form of chatbots can make it seem like there are always employees available to answer customer needs.

ML makes chatbots increasingly human. RPA can employ AI and ML where appropriate in terms of security to manage diverse financial accounts. Buying and selling on the stock market could be, as a hypothetical example, automated via RPA, and optimized through AI leveraging ML. Expect RPA, ML, and AI to become increasingly influential.

However, there is some risk. Automated processes involve software that can be hacked. While enhanced security does much to help avoid such circumstances, automation yet represents vulnerability “surface area” expansion. Such solutions should only be adopted with tech professionals available to assure associated fintech trends don’t expose your financial company to unnecessary risk.


Increasing “Contactless” Payment from Ecommerce

Ecommerce makes it possible to browse global stores, buy goods, pay for them, and have them delivered right to your front door. This is one of the most relevant present fintech trends: online remote payment, or “contactless” commerce.


Working with New Technologies Poised to Expand

Notable fintech trends likely to remain well into the future include digital banking, blockchain tech, RPA, AI, ML, and “contactless” payment. To assure your financial institution is maintaining competitive viability and security, it makes a lot of sense to work with tech companies that understand these trends and can help you adopt those which best match your operational needs without exposing you to risk that isn’t necessary.


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Fintech
Fintech

The Role of Fintech in Banking: What Does the Future Hold?

The banking and finance industry is undergoing a transformation. Developments in fintech will revolutionize banking in multiple ways by using innovation to boost efficiency, the leveraging of cloud technology, robotic process automation (RPA), and AI. From mobile payments to online lending, the way we bank is changing. Mobile apps are making it easier than ever to handle your finances on the go.

All of these innovations have changed our expectations for banking and managing personal finances. Consumers no longer need to wait in line at an ATM or visit a bank branch to check their account balance.


Introduction to FinTech

Fintech – short for financial technology – is a term used for any technology used to augment, streamline, or digitize traditional financial services. Banks use fintech for both back-office processes — payment systems, monitoring of account activity, management of fixed income products, capital markets trading, for instance—and consumer-facing solutions, like the app you use for checking your balance. Individuals use fintech for everything from tax calculations to dabbling in the markets. Businesses rely upon fintech for payments processing, e-commerce transactions, and accounting. And in the Covid era more and more businesses are turning to fintech to enable features like contactless payments.

Fintech has also drawn the attention of the regulatory community; in 2016, the United States Securities and Exchange Commission (SEC) announced their intention to conduct a study on FinTech – one of the first regulatory bodies to do so. And fintech has drawn the attention of the legal community and has led to the development of Fintech Law [ibid].

With the invention of new technologies such as Robo-advisors, chatbots, and even artificial intelligence (AI), the world of financial technology is changing at an unprecedented rate for the better.


The Role of Fintech in the Banking Industry

Before the advent of the Cloud and AI, the banking industry operated with slow and costly legacy systems that required large up-front investments to upgrade. This created bottlenecks in the turnaround time of the industry.

Investment banking has traditionally been a slow and laborious process, focused on low-value activities such as arranging finance for clients. However, as the FinTech revolution continues to take hold, investors and banks will benefit from greater efficiency.

The abundance of data available, and the evolution of AI, has made it possible to improve the way we understand and act upon information. As a result, investment banks and research analysts can analyze massive volumes of data and make accurate predictions.


How Can FinTech Transform Financial Services?

One of the most significant changes that investment banks have seen in recent years is the emergence of so-called Robo-advisors. Robo-advisors essentially use algorithms to make customers’ investment decisions, which should appeal to those concerned with investing their own money. The Robo-advisors also aim to give investors an entirely digital experience when managing their portfolios.

One of the best uses of Robo-advisors for financial institutions is when customers want to buy and sell a financial instrument. These customers typically make automated financial decisions at a massive scale, so Robo-advisors offer banks the chance to process transactions without dealing with the concerns and restrictions of the stock markets.


What Are the Benefits of FinTech?

Efficiency, both in terms of time spent and money spent, is a driving factor behind any investment in FinTech. By allowing businesses to perform tasks from anywhere, FinTech has made up for some traditional work hours, which are often clocked in by inefficient travel to an office. It has also shortened the working hours required to complete a task.

The introduction of cloud-based technology has also led to lower operational costs, reduced capital expenditures and heightened connectivity. This has allowed businesses to process transactions and further increase productivity by providing a dynamic service that is quicker, cheaper, and far more convenient for clients and their customers.


Conclusion

The disruption that FinTech investment has caused has empowered consumers and allowed them to take greater control of their financial lives. Financial services are now ripe for disruption and require a complete rethinking of how the industry operates, focusing on delivering best-in-class digital customer experiences.

This shift in how financial services are provided creates opportunities for the industry to reorient itself towards long-term profitability.

This is all good news for fintech providers who are adapting their business models to more quickly harness the potential of technology to offer consumers more benefits.


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IOT and Smart Banking
Fintech

IoT and the Evolution of Smart Banking

From 2018 to 2023, the worldwide IoT market in the financial, banking, and insurance (BFSI) domains is estimated to surpass $2030 million, growing at a CAGR of 52.1 percent. The rising usage of IoT systems in banking operations has contributed to the industry’s development.

In light of the COVID-19 shutdowns, online banking became a necessity. Lending and financial firms had to integrate high-tech technology, such as AI, IoT, and machine learning, to boost user engagement. IoT introduces a myriad of prospects and possibilities to the field of financial software solutions. Banks can have a detailed view of customer finances in real-time because of customers’ use of smart devices. Through structured data analysis, banks can anticipate customer needs and provide solutions and advice to help customers make smart financial decisions. Thus the ‘Bank of Things’ becomes a powerful tool to facilitate the banks’ increase in customer loyalty.


Privacy and Security-Enhanced Banking

Banks may now use blockchain technology as part of their security risk management, thanks to IoT connectivity. By using blockchain, identification theft and brute-force attacks can be reduced since hackers cannot change customer credentials during authentication.


Beyond Banking: Expanding the Range of Services

IoT also allows financial firms to become more customer-centric by expanding their offerings beyond conventional banking. U.S. banks, for example, have launched IoT initiatives to help motivate their clients to keep fit. Bonuses and financial rewards are granted when the customers complete achievements. This helps foster a strong Bank-Customer relationship. It makes customers feel their bank is looking after their health.


User Experience Enhancement

By offering frequent insights and a tailored experience, IoT has a significant influence on banking customer care. Thanks to the Internet of Things, bank customers may now use their smartphones to book appointments and check their account information. Customers may then monitor their status without having to waste time waiting in long lines.


Transparency Has Improved

IoT in banking will be defined by lenders’ efforts to capture precise data on clients, offering some coverage and assisting banks in avoiding the danger of unreliable borrowers. Financial institutions will be able to make better credit decisions as a result of this.


Automated Transactions

In most scenarios, your traditional banking payment methods will become obsolete as transactions are automated and incorporated into new services — since machines will be able to exchange financial data instantly, virtually anything could become a payment system.


Data-Driven Analytics

The Internet of Things improves data collection accuracy, speed, and effectiveness and produces more reliable results. Banks can acquire up-to-date financial information, which can assist them in making better-informed choices.


Better Security for Payments

IoT can enable new payment methods, such as biometric tokens and smart cards. Due to intelligent card technology already being used in most devices, ATMs may no longer be necessary. IoT in banking can also improve wearable transaction techniques, allowing you to pay with wristbands instead of cards.


The Most Important Trends Driving Big Data and IoT Adoption in Finance and Retail

IoT simplifies and eases risk assessment
Risk assessment is such an area that IoT will prove transformative in the near future. Consider the way risk assessment is now carried out in the financial services industry. It’s a very subjective procedure, comparable to one that sparked the Great Recession in 2008. Consider a world in which big data and IoT technology enable intelligent risk analysis.

Wearable technology is becoming more popular for financial transactions
Smartwatches and wearable tech that monitors your health and activities automatically are becoming more ubiquitous. These gadgets constantly give vital information regarding your well-being.

Monitoring and movement of smart assets
Computers and technology allow for partial automation of asset monitoring, but there are still many manual processes and checks. Big data and the Internet of Things will change this.

Increased efficiency in inventory control
The impact of an ineffective inventory control system is generally understood among retailers. According to data, businesses in the United States lose an average of $45 billion per year owing to a lack of actual inventory and a staggering $224 billion due to excess inventory.

IoT will transform POS processing
IoT technology will play a big part in the POS sector which is expected to reach $109.1 billion by 2025. Today’s best POS systems have numerous impressive features, but POS technology will keep evolving.

There is growing adoption of biometric Point of Sale, the emergence of mobile POS transactions, digital product tracing that reduces queuing and enables remote payouts, and much more will arise from the emergence of intelligent POS solutions.


Final Thoughts

Regardless of whether you work with the latest technological firm or an internal specialist for your financial firm, make sure you are working with IoT professionals who have a strong grasp on practical and cost-effective solutions as well as comprehensive IoT expertise.


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