The structure of modern finance is centralized. Traditional financial markets have been formed over the last 200 years, so we now have established concepts: brokers, stock exchanges, and so on. Financial assets include shares of companies (private and public), bonds, and other financial instruments. The money we use is issued by the central bank and, to some extent, controlled by it. In addition, the central bank indirectly affects the value of our loans and savings.
Financial markets also operate with the help of outsiders:
- An investor buys or sells shares through a broker.
- Traders keep their balances on exchange accounts for trading.
- A bank customer trusts financial institutions to save money in their accounts.
It wouldn't be wrong to assume that we have delegated control of our finances to other individuals and institutions.
The biggest problem of the centralized system remains corruption. Although, on the one hand, central banks have complete control over the printing of money and its value, on the other hand, few details of their operations come into the public eye. Can we be sure that, for example, they are not acting in the interests of influential people?
DeFi – decentralized finance – can be the solution to this problem.
What is DeFi?
DeFi, or decentralized finance, proposes to create a different system. Essentially, DeFi is a set of financial applications based on blockchain technology. Enthusiasts of decentralized finance are united by the idea of building a relationship where participants interact with each other without the mediation of government, banks, and courts. Instead, these platforms operate based on smart contracts – a digital analog of legal agreements. Simply put, these are financial systems based on blockchain technology. The goal of DeFi is to develop a quality alternative to the traditional banking system with the help of decentralized technologies.
Why are decentralized systems the right solution for such inquiries? Because they allow investors to manage their assets independently and not depend on other persons or centralized institutions.
First, let's take a look at what DeFi consists of:
- DeFi is an independent financial ecosystem open to all users. In it, participants interact with each other directly, without intermediaries – banks, credit institutions, and others. This way, you can make transactions faster and cheaper.
- DeFi protocols are considered one of the most reliable and secure because they are based on blockchain and smart contract technologies.
- Blockchain is a distributed database where information about completed transactions is stored as a continuous chain of blocks. Therefore, it is impossible to falsify the information within this system.
- A smart contract is a computer algorithm that accurately executes a given agreement between the two parties to the agreement.
Smart contracts fulfill the terms of the agreement in the blockchain and make a financial turnover within the specified area. This process is fully automated and guarantees the parties to the contract that the information recorded in the code is protected, encrypted, and cannot be used by third parties for their purposes.
Thanks to its reliability and practicality, DeFi quickly became popular and continues to be in high demand. In November 2021, the size of the decentralized finance market reached $274 billion.
Why do we need a DeFi ecosystem?
If Bitcoin is a peer-to-peer electronic money system, DeFi is a peer-to-peer system of electronic financial instruments. As a result, the ecosystem of decentralized finance can provide anyone with access to traditional financial services, eliminating the need for intermediaries and lowering entry barriers.
DeFi applications and services are potentially helpful for residents of countries with underdeveloped or unstable economies. However, DeFi services are also in demand in developed countries, especially in lending, investment, and the development of new revenue models.
The main advantage of DeFi services is hidden in its naming.
- Decentralization. Due to this, control over the ecosystem is evenly distributed among many players. There is no excessive regulation, transactions are transparent and fast in execution, and no long chain of intermediaries is required. This is convenient, for example, in the lending niche. There is no intermediary bank, which means that the one who gives the loan does not have to share the profitability with a bank that accepts deposits and earns on the gap between interest rates.
- Smart contracts and voting govern DeFi services. Smart contracts allow you to establish the rule of law in the ecosystem and create clear game rules.
- Open-source. Like the blockchain, services based on open-source protocols are more trustworthy: they can be verified, improved, and used in other services.
At the moment, most transactions in DeFi are with classic crypto assets that have no real value in the offline economy. Experts anticipate a breakthrough in decentralized assets when tangible assets such as real estate or corporate securities are freely stored and exchanged on blockchains.
A vast number of private companies worldwide do not have plans to become public and, because of this, are limited in their options for attracting investments. This makes them much less liquid than public companies' shares. Tokenization allows you to radically change this situation and the market as a whole.
At the moment, it is technically possible to tokenize any business, from heavy industry to investment funds. By issuing liquid security tokens, the company opens up a whole new world of opportunities:
- Interest from investors. Buying and selling security tokens on a decentralized platform at any time without intermediaries is a significant advantage. Stobox developed its own solution, the DS Swap platform, which enables the secondary trading of security tokens.
- Opportunity to attract investors from all over the world. The geography of STO participants is practically unlimited. The company can remain private and attract investments from investors from all over the world online.
- New creative possibilities. Decentralized finance opens up new business models for the simultaneous use of security tokens, utility tokens, and NFTs.
- Low entry threshold. Investments can start from $100. In fact, anyone who wants to save their funds can buy a real estate project security token and receive a stable income. This advantage is also supported by the fact that more than 2 billion people in the world still do not have stable access to banking services, which means they cannot save money in deposit accounts.
Tokenization has gone far from a theoretical concept. Today it is an actively developing technology at the intersection of traditional finance and blockchain. Many companies and government bodies are exploring the possibilities of tokenization. For example, a group of Stobox experts participated in developing laws related to tokenization, together with the Ministry of Digital Transformation of Ukraine. We have spent over 50,000 hours researching and consulting for our clients. If you would like to learn more about tokenization for your company, we would be happy to advise you.