The money business is the biggest of them all. Lending, borrowing, betting and insuring stuff is collectively worth trillions of dollars. In fact, some estimates suggest the financial services sector accounted for 9% of global GDP in 2019 and is probably a bigger portion now.
Since the financial services sector is so asset-light and competitive, it’s also quick to adopt new technologies and innovations. In recent years, many of these innovations have been based on the blockchain technology that powers Bitcoin. This emerging field of Decentralized Finance (DeFi) is currently worth $84 billion and rapidly expanding.
Here are three examples of how DeFi tools are disrupting the traditional financial sector.
Alchemix – Disrupting Fixed Income Products
“Loans that pay themselves off,” sounds like the kind of bizarre alchemy that only decentralized platforms could enable. Alchemix provides these “self-repaying” loans through a combination of stablecoins, yield farming and tokenization.
Alchemix provides loans backed by collateral and then uses the collateral to generate a yield. Part of the yield is used to pay down the loan while part of it is used to compensate the platform’s developers and backers. Essentially, Alchemix disrupts banks by managing the loan on the borrower’s behalf.
The concept is relatively new and niche, but it’s an example of the way DeFi developers are getting creative with their financial solutions.
dYdX – Disrupting Derivatives
Backed by heavyweights like a16z and polychain, dYdX is one of the most well-funded and oldest DeFi platforms around. It offers investors decentralized perpetual contracts – an innovative new form of futures that allow investors to bet on digital assets in perpetuity.
In simple terms, the platform allows investors to bet on the future price of major cryptocurrencies such as Bitcoin and Ethereum with more leverage and less time restrictions than traditional trading platforms. The platform offers up to 25x leverage on trades at the moment.
Combining high leverage derivatives with highly volatile cryptocurrencies is a risky proposition for most retail investors. But dYdX’s tools seem well-suited to institutional investors and professional money managers looking to boost their performance. In his most recent interview with the media, CEO Antonio Juliano said, “derivatives volume, really driven by perpetual contracts, has become bigger in terms of trading volume than everything else in crypto put together.”
Derivative volume is also higher than regular stock trades on the traditional stock market, so dYdX seems like the perfect example of how DeFi replicates and improves on traditional capital market structures.
Nexus Mutual – Disrupting Insurance
While most DeFI projects are focused on generating capital or passive income, few have focused on protecting capital. That’s a gap Nexus Mutual hopes to plug. The platform offers users decentralized insurance schemes based on the Ethereum blockchain.
Much like traditional insurance, Nexus Mutual is based on a pool of users sharing risks. However, this pool is decentralized and governed via a NXM token. The platform offers coverage for smart contracts right now, but could soon cover traditional risks like earthquakes and property too.
Nexus is yet another example of DeFi’s ongoing disruption of the traditional financial sector.