DeFi, or Decentralized Finance, is a rapidly growing industry that is built on the Ethereum blockchain. DeFi projects aim to provide financial services that are typically provided by centralized institutions, such as exchanges, lending platforms, and derivatives markets. These services are created through smart contracts, which are self-executing contracts that can be programmed to do anything from transferring tokens to issuing loans. By using smart contracts, DeFi projects can provide their services without the need for a central authority. This allows users to interact with DeFi applications directly, without having to go through a third party.
This article suggests that decentralized finance (DeFi) is real and will succeed, not with a cryptocurrency, but instead by using tokens (presumably linked to traditional payment networks and bank accounts). An article in Fortune suggests that this is already happening in India utilizing the Unified Payment Services (UPI). What is not being discussed, however, is that DeFi requires participants to operate using the same smart contract solution and the same Oracle that the smart contracts utilize. Today, smart contract technology and supported Oracles are blockchain-dependent, which will certainly limit adoption:
“Irfan Ahmad (VP at State Street, the world’s largest custodian bank) recently said that cryptocurrencies have not just entered another winter but a “polar vortex”, which seems a reasonable view given the collapse of the Celsius decentralised finance (DeFi) protocol and the news that Three Arrows Capital has filed for bankruptcy and so on. However, beneath the ice, his and other investment banks are working on using shared ledge technologies to build new trillion-dollar markets that do not involve speculative cryptocurrencies but instead use digital representations (ie, tokens) linked to real-world, hard assets.
There is no paradox at all: Whether cryptocurrencies survive the coming storm of regulation, central bank digital currencies, instant payments and digital identity, institutional markets will ultimately use the new infrastructure to trade bonds, gold and carbon in digital form. It won’t only be commodities that are tokenised and traded without clearing and settlement. Banks will tokenise all forms of collateral, such as title to property, using the technology. As the Bank for International Settlements (BIS) set out in their current Bulletin (no. 57, 14th June 2022), ‘DeFi lending must engage in large-scale tokenisation of real-world assets unless it wants to remain a self-referential system fuelled by speculation.’ ”
Read more from Mercator Advisory Group. This Viewpoint analyzes smart contracts and the issues that could arise if used to support two common payment card scenarios.
Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group