Where it all comes together: DeFi trading platforms. Growing numbers of decentralized exchanges enable trade in DeFi products, driving adoption and opening up new investment opportunities.
A DeFi trading platform, or decentralized exchange (DEX), is an exchange market that does not rely on a third-party service to hold the customer’s funds. Instead, trade in DeFi products occurs directly between users (peer-to-peer) through an automated process using smart contracts on the Ethereum blockchain. DEXs are still much smaller in scale compared to centralized exchanges. They use some highly innovative methods for swapping tokens, such as atomic swaps, but they still suffer from lack of volumes due to their more obscure nature and user interfaces that many find difficult to manage. They offer better transparency and security, but limited speed and liquidity are still shortcomings that the DEXs need to solve. Although DeFi trading is at an early stage of adoption, it is growing in importance. Total trading volume of DEXs increased from US$ 71m in January to US$ 288m in June 2019, with Eth2dai and Uniswap standing out as two of the fastest-growing DEXs.
Trading volume H1 2019 (source: DApp Total)
No. of monthly active users H1 2019 (source: DApp Total)
Margin, derivatives, liquidity protocols and prediction markets
Trade in DeFi products hasn’t been limited to simple trading instruments, as platforms have taken steps to provide a wide array of trading possibilities. For example, traders seeking higher returns through leverage at the expense of more risks can find various vehicles to meet their needs. Margin trading, derivatives like cryptocurrency future and perpetual contracts, options, swaps, credit default swaps and many more products function efficiently on DEXs. With interoperability protocols like Cosmos and Polkadot coming of age, it won’t be long before crosschain DEX transactions become common. Prediction markets like Augur and Gnosis offer opportunities to users by creating incentives that benefit those who provide accurate forecasts of future events.
While the transaction requirements of financial services applications are not trivial, they are also not as demanding as mainstream consumer applications, where millions of users are transacting with each other and the system in real time. The 3 most common financial services that DeFi has touched are wallets, payments, and wealth management.
- Metamask and MyEtherWallet are the two most dominant wallet services operating for Ethereum-based tokens. MyEtherWallet can also be integrated with hard wallets like Trezor, which are considered more secure to use. Metamask has won the most popularity because it offers browser integrations.
- Protocols that facilitate cross-border and quick payments have been the most widespread use cases for cryptocurrency-based projects.
- When all the traditional financial services become influenced, financial experts have to step in to help the novice investors grow their assets. This is where asset and wealth management services in the decentralized environment have commenced.
DeFi in Asia
Asian users are interested in decentralized finance, even with not many big projects based in Asia. Project developers and investors in the East might want to consider this as potential for wider adoption. Of the 20 DeFi projects listed in DeFi Pulse, which has become an industry reference, only three (InstaDApp, Nuo Network and Kyber Network) are based in Asia, and they represent only about 10% of the approximately US$ 500 million locked in these financial protocols. Other projects like Ren and Needle are not contributing notably to the ecosystem. From the Website traffic data obtained from SimilarWeb, the biggest share of MakerDAO users are in China, and they rival US users in Compound and dYdX. Many users may be using VPNs, so Asian users may actually be under-represented. Eastern countries are believed not to be predisposed towards decentralization, but they see these businesses as a quick and reliable way of making money. Singapore-based Huobi Global is partnering with Nervos to launch its own Huobi Finance chain, which will allow financial institutions, businesses and exchanges to launch their own blockchains, tokenized assets and DeFi services.
DeFi in Europe
Europe is not lagging behind in this race. Where the Asian countries are focused on payments and the US on lending, European nations are changing wealth management services to help investors grow their portfolios with decentralized services. Melonport AG, domiciled in Zug, Switzerland, is a fully decentralized tool for both individuals as well as large institutions to set up and manage an investment fund in digital assets. SETL, London, is an initiative to deploy a multi-asset, multi-currency institutional payment and settlements infrastructure based on blockchain technology.
The growing number of cyberattacks leaves the public at risk of financial loss and data exploitation. The existing financial system excludes millions of people from basic financial services because of barriers such as location, wealth and status. Numerous startups and large corporations have recognized the potential of open-source networks to change and decentralize economic activity. In September 2019, Nasdaq announced plans to add a new index to offer information on blockchain projects working in the DeFi space. It will be called Defix and will list projects including MakerDao, Augur, Gnosis, Numerai, 0x and Amoveo to help investors track the activity of blockchain-based DeFi projects. The potential of blockchain technology and the spread of crypto-based financial services could shape a new world of decentralized finance characterized by wider global accessibility to financial services, safer transactions and lower transaction costs.
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