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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Blockchain Technology
Blockchain

Advantages of Using Blockchain Technology Across All Industries

Blockchain is a distributed, unchangeable ledger that makes keeping track of transactions and managing assets in a corporate network easier. Intangible assets include intellectual property, patents, trademarks, and brand names. Tangible assets include vehicles, cash, and land. A blockchain network lets you track and trade anything of value, reducing risk and lowering costs for all parties involved.


The Blockchain: The Key Elements

Technology-Based on Distributed Ledgers
Every network participant enjoys access to a distributed ledger and its unchangeable record of transactions. The shared ledger eliminates the overlap of effort associated with traditional corporate networks by recording transactions only once.

Immutable Records
A transaction cannot be changed or altered after it’s been added to the shared ledger. Whenever an error occurs in a transaction record, another transaction is needed to reverse it, and then the two transactions are displayed.

Smart contracts
A smart contract – an automated set of rules – is recorded on a blockchain and runs automatically to speed transactions. Smart contracts can be used to set conditions for the transfer of corporate bonds, specify payment conditions for travel insurance, and many other things.


The Blockchain: A Powerful Business Tool

Increased Productivity
Blockchain eliminates go-betweens from a wide range of operations, including real estate and payments, since it is decentralized. Due to its P2P cross-border capability and digital currency, blockchain enables faster transaction processing than traditional finance. Unified ownership records make property management more efficient, along with smart contracts that automate landlord-tenant relationships.

Increased Security
Every new transaction on a blockchain is encrypted and connected to the preceding transaction; blockchain is significantly more secure than traditional record-keeping technologies. As its name implies, blockchain is created by a chain of computers joining together to authenticate a “block,” then adding it to a ledger, forming a “chain.”

Blockchain is made up of a complex sequence of mathematical integers that cannot be modified once created. The incorruptible and immutable blockchain network protects it against tampering and hacking. Because of its decentralized design, it has the unique property to be ‘trustless,’ which means that participants need not trust one other to trade safely.

Increase the Effectiveness of Marketing Campaigns
Marketers may utilize blockchain technology to track customer data and customer engagement. Skilled marketers may use this information to create innovative campaigns with a higher return on investment. During development, you can quickly identify any changes you make within your campaigns.

Using blockchain technology, marketers can help figure exactly when and who made a mistake if you mess up down the line. Finally, blockchain enables advertisers to confirm whether the traffic they generate is genuine. If bot activities don’t exaggerate your marketing statistics, you receive more bang from your marketing budget.

Improved Transparency
Blockchain’s most remarkable feature is that public addresses can be viewed, and the transaction ledger can be searched. It adds an unparalleled degree of responsibility to banking systems and organizations, making all sectors of the company accountable to operate with honesty and integrity for its growth, society, and consumers.

Better Traceability
With blockchain ledgers, every time a transaction occurs on the blockchain, a record of that transaction can be used to identify the origins of goods. Exchange-related organizations can use this to enhance security, avoid fraud, and verify the legitimacy of traded assets. Medical industries can use blockchain to track supplies, while the art industry uses it as a means to prove ownership irrefutably.


Blockchain-as-a-Service for Simpler Integration

Business owners face the issue of blockchain integration because it is sophisticated and requires a highly skilled technical team. Blockchain-as-a-Service companies enable businesses to seamlessly integrate blockchain technology without causing too much disruption in their everyday operations.

Blockchain technology has the potential to replace numerous operations that organizations use daily. Why not be ahead of the game by giving it a shot? It has already been shown to be a trustworthy solution in several insurances and traditional banking organizations.


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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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