DeFiFinancial ProductsFinance Industry

Vishal Bachani

Fri May 20 2022

Vishal Bachani

Decentralized Finance, i.e., DeFi unbundling the world of traditional finance. It's digitizing the global finance industry and aims to create a “bank-less” society in the future.

That’s right – in DeFi, there are no banks, no intermediaries, and no fees charged by financial intermediaries, just code.

For centuries, financial intermediaries have had control over financial products and processes like borrowing, lending, insurance, and trading.

DeFi companies are built on smart contracts and blockchain technology. They aim to place various financial products and processes in the hands of regular citizens and away from centralized institutions.

The Emergence of DeFi

In 2021, the total value locked (TVL) in the global DeFi ecosystem crossed the $247.5 billion mark. Of course, that figure is still tiny compared to traditional financial markets like global commodities, equities, or derivatives markets. But, the DeFi industry’s growth rate in terms of innovations and the amount of capital it has secured is spectacular.

  • The transparent and time-efficient nature of DeFi is attracting many users.
  • Several ground-breaking DeFi companies are applying smart contracts and blockchain technology to traditional financial products and processes.
  • From lending/borrowing to insurance – the emergence of traditional financial products in the DeFi Landscape comes with many opportunities.

  • Here are the top traditional financial products in the DeFi landscape that investors should watch out for-

    The DeFi Derivatives Market

    Derivatives are financial products. Options, collateralized loans, futures, and prediction markets are all derivatives products. All derivatives derive their worth/value from underlying assets. The underlying assets can be stocks, commodities, bonds or even cryptocurrencies.

    By investing in derivatives, investors gain exposure to certain assets without actually having to hold them. How big is the global traditional derivatives market? Its value is 10 times greater than the total global GDP. Some say it’s worth a quadrillion. The DeFi derivatives market is tiny in comparison.

  • But, the traditional derivatives market is dominated by institutional investors. Retail investors who want to enter this market need brokers to do so.
  • The DeFi derivatives market is the opposite of that. There are no brokers required in this market. All smart contracts are settled automatically on-chain.
  • As long as retail investors fulfill the terms of the smart contracts they sign, they have total control.

  • The DeFi derivatives market has the potential to bring low-barrier financial instruments to people across the world. Here are the key players in this promising market-

  • dYdX: With over 40% of the total DeFi derivatives market share, dYdX is currently the biggest name in this market. It’s a decentralized exchange platform designed specifically for cryptocurrency margin trading. The bulk of dYdX’s crypto derivatives products resides on the Ethereum blockchain. The platform currently supports margin trading for crypto-assets like BTC, ETH, DOT, etc.

  • Synthetix: In the Synthetix ecosystem, users get exposure to assets/commodities without requiring any intermediary. The crypto derivatives platform creates “Synths.” These financial instruments mimic the price actions of whatever assets/commodities users track. Users can trade “Synths” of gold, oil, USD, Bitcoin, and other crypto-assets on Kwenta, Sythetix’s decentralized exchange.

  • Wrapped BTC:  Wrapped Bitcoin (WBTC) gives users the ability to create Ethereum-based derivatives of Bitcoin. Bitcoin owners use the derivative versions of their BTC to lend, stake, and yield-farm on Ethereum’s blockchain.

  • The total value locked (TVL) of the DeFi derivatives market is still only 3% of the total DeFi market’s TVL. But, the market’s recent growth is highly promising.

    DeFi Loans

    Crypto applications like Maker and Compound are enabling users to take loans of all sizes without involving any intermediaries. These DeFi lenders typically issue loans in stable coins like USDC. Many lenders even issue loans in currencies like Ethereum (ETH), Basic Attention Token (BAT), or Augur (REP).

    In all DeFi lending platforms, cryptocurrencies are used as the underlying collateral to secure the loans. Thanks to smart contracts, users can pass through complex due diligence processes within seconds. They simply need to stake the crypto-assets in their crypto wallets to qualify for DeFi loans.

    Maker Protocol (MakerDAO) is currently the leading DeFi lender in this sector. Compound, Dharma, and Nuo Network are also notable mentions. Users can take out collateralized loans from these DeFi lending platforms very easily. Here’s an example of how users take out DeFi loans from the MakerDAO platform-

  • Let’s say you want a loan. You’re willing to stake your Ethereum to obtain a DeFi loan.
  • Send the amount of Eth you want to stake to your Ethereum wallet.
  • Visit MakerDAO’s Collateralized Debt Portal; connect to your Ethereum wallet.
  • Review the amount of Ether you want to stake as collateral. Enter the amount of DAI you want as a loan. DAI is a crypto asset. It maintains a stable 1:1 value with the USD.
  • Review the terms of the loan. Click “Collateralized & Generate” to post your ETH as collateral in return for your newly issued DAI loan.

  • Once you receive a DeFi loan, you can use it to purchase more crypto assets for margin trading. You can, of course, sell your DAI for USD and use the loan for real-life purposes as well.

    DeFi Insurance

    Traditional insurance products help people protect themselves from worst-case scenarios. DeFi insurance aims to do the same. In the DeFi world, users face several threats like – hacks, protocol failure, exploitation of smart contracts, etc. Users can protect themselves against these risks by getting DeFi insurance.

  • Risking a significant chunk of your crypto portfolio on a margin trade? You should get DeFi insurance.
  • Experimenting with a new protocol? Again, getting DeFi insurance makes sense.
  • Locking your crypto assets on a yield farming platform? Without DeFi insurance, your crypto assets are never safe.

  • As you can see, DeFi insurance has several applications. There are many DeFi insurance providers in the market. The most popular ones include-

  • Nexus Mutual: On Nexus Mutual, Ethereum owners pool their funds to give insurance to other smart contracts. The insurance buyers pay fees to this pool of ETH owners. They receive payouts if their covered risks come to pass.

  • Unslashed Finance:  Unslashed Finance specializes in providing protection for DeFi risks like centralized exchange hacks.

  • Risk Harbor: Risk Harbor is a DeFi insurance protocol that offers customers protection for many crypto-backed stable coins.

  • Conclusion

    Interest in these traditional financial products in the DeFi landscape will likely persist for several years. These DeFi products are making alternative asset classes more liquid, more interchangeable, and more easily accessible for the average citizen.

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