The infrastructure that supports the traditional financial system has remained more or less unchanged for decades. Trust is placed firmly in the hands of intermediaries such as banks and payment brokers that take care of everything related to our financial transactions and savings.
In modern times, we’ve seen fintech startups emerge to solve some of the inefficiencies within legacy banking, resulting in faster payments through mobile apps and greater security. However, the heavily centralized and profit-driven nature of traditional finance continues to present hurdles to accessibility and efficiency.
This is why so many are excited about the emergence of blockchain and decentralization, which has led to the creation of an entirely new financial infrastructure.
Decentralized finance, known as DeFi, promises to solve the inefficiencies of the traditional financial system with the creation of intermediary-free financial products and services anyone can use.
These decentralized applications (dApps) can function without the need for banks and financial institutions, and are not limited to those with a suitable “credit” standing.
Blockchain is the glue that holds the world of DeFi together. DeFi infrastructure is hosted on decentralized, transparent and immutable ledgers of record, ensuring no one can game the system.
Some of the most prominent blockchains leveraged by DeFi include Ethereum, Binance Chain, Fantom and Solana. These blockchains store the details of each transaction, deposit and withdrawal made by the DeFi apps that sit atop of them, including the details of the smart contracts that power many of their features.
They handle all of the core accounting functions required to ensure DeFi works, matching inputs and outputs, eliminating the need for external systems to reconcile balances.
DeFi’s Data Advantage
This is in stark contrast to the slow and clunky legacy financial infrastructure, which is built on innumerable systems that separate the processes of settling and clearing transactions. With DeFi, each transaction is processed, cleared and settled at the same time as it is broadcast to the blockchain. Not only is DeFi more efficient, it’s also more accessible. Because there’s no centralized intermediary, there’s no need to provide identification to access DeFi. All that’s required is a device with an internet connection. The user’s wallet serves as both their ID and their access pass.
Costs are lower too. Traditional finance is a for-profit business and users typically pay fees on each transaction and service they use. While DeFi does require gas fees to be paid, these are typically very low. Gas fees are designed to serve as an incentive for users to validate the network, meaning they also provide opportunities for DeFi users to earn rewards through staking and other activities.
Blockchain is basically a distributed database that can be used to store just about any kind of data, and that has created some unique possibilities for DeFi apps. The growth of the crypto industry has led to blockchains storing all manner of information, recording the price of commodities, local weather conditions, football results and much more besides. Because of this, dApps can tap into blockchains to “see” this data and expand the possibilities of DeFi far beyond what traditional financial services can do.
With the recent launch of Flare’s unique State Connector, we now have universal interoperability between blockchains using smart contracts that prove the state of any open system in a secure and decentralized manner. With it, dApps can connect to both blockchain and non-blockchain data sources. They can even tap into non-contract tokens such as Bitcoin, Dogecoin and XRP, allowing these assets to interact with Ethereum-based smart contracts. In other words, Flare makes it possible for any dApp to read data from any other blockchain or system. For instance, dApps would be able to know about the current weather conditions in a given area, the price of oil, the winner of general elections and pretty much anything else that happens in the world.
This could lead to some incredible possibilities that will blow the doors open for what DeFi could be capable of, with dApps that can be fed information about the world and execute smart contracts based on what they’re told, without any intermediary. For instance, it has led to the creation of blockchain-based insurance apps such as Etherisc, which promise to pay out compensation to farmers automatically based on local weather reports.
Helping dApps to understand the flow of blockchain data is a fledgling project known as SubQuery, whose team developed a protocol that makes it easier to garner information from distributed ledgers. While blockchains are open and accessible, they’re not always easy to navigate. Data is entered chronologically, as it happens, meaning that information is spread all over the place and difficult to find.
To help insurance apps pay out to drought-stricken farmers in a timely manner, developers need tools to process and query blockchain data more quickly. This is where SubQuery comes in. The protocol is a solution for querying and aggregating blockchain data rapidly, so it can be used to power ambitious dApp concepts. With SubQuery, developers obtain a toolkit including a complete application programming interface for organizing and querying data. It also provides an open-source data indexer that’s able to organize the information it queries. The key thing to understand about SubQuery is how it makes it possible for dApps to ask the blockchain questions and extract the answers a developer might need in just seconds and in an entirely decentralized way.
Blockchain can also be used to supply the data needed to train artificial intelligence models that power next-generation dApp features such as facial recognition, natural language processing and predictive capabilities. In this regard, one of the most exciting projects is Oraichain, which has built a data oracle platform that’s designed to connect AI-based APIs to smart contracts. Through this, it’s possible to enhance smart contracts with AI. What this means is that dApps will be able to tap into reliable AI data from external sources. This is done by sending requests to validators that acquire and test data using external AI APIs. Once the data is validated, it is stored on-chain where any dApp can access it.
Oraichain has already launched an AI marketplace where AI providers can sell the models they create to developers in return for ORAI token rewards. Existing services on the marketplace include price prediction, face authentication and automated yield farming models. For AI creators, they get to list their models without the need for any third-party, allowing them to better compete with larger entities. Oraichain provides additional infrastructure to support AI model developers too, including a fully functional web UI to publish their AI models rapidly and securely. Through this ecosystem, AI developers can easily follow the flow of requests for their services, increasing transparency in the system. Users can then see which validators are the most reliable and find trusted AI models.
Making DeFi Happen
Innovation around data accessibility in DeFi will have big repercussions, and this has already been recognized by the traditional finance world. Back in 2019, the World Bank said in a report that DeFi has the potential to re-engineer economic models, leading to the creation of “markets and products that were previously unavailable and unprofitable across emerging markets.
That forecast might seem prescient to the uninitiated, but in fact it is already happening. The RSK blockchain is designed as an infrastructure layer for “Everyday DeFi” and is working to bring greater functionality to the world’s most popular and widely used cryptocurrency, Bitcoin. Unlike Ethereum, Bitcoin’s blockchain lacks native smart contract capabilities which makes it difficult to implement complex use cases besides basic transactions.
RSK employs a “merged mining” technique that enables dApps to implement EVM-based smart contracts with Bitcoin. Further, RSK has created the Roostock Infrastructure Framework, or RIF, atop of RSK, to serve as the building block of Everyday DeFi. What RIF does is it provides a name service to make Bitcoin wallet addresses human-readable. In this way, users can login to their wallets more easily and safely access services around saving, borrowing and lending. Transactions are faster too thanks to RIFs implementation of zero knowledge synchronization.
A good example of the unique capabilities DeFi infrastructure enables is the SeaCoast app, which is a digital platform that aims to reward and make life easier for sailors and seafarers as they traverse the world’s maritime coasts. SeaCoast provides sea lovers with both the tools and content they need to navigate from coast to coast with the opportunity to earn rewards for participating and uploading information to the platform.
SeaCoast leverages augmented reality technology to overlay data points onto smartphone footage of any coast, so users can spot local amenities, points of interest and more. It can even identify moors and harbors and provide information on how to reach them and dock safely. The DeFi aspect comes with SeaCoast’s Paperboat app, which provides information on berth availability at various harbors and tools to book one quickly and easily, and then pay for it in cryptocurrency. Users can also compare prices with other nearby harbors, and then upload the relevant documentation they need to provide before they arrive in port. Finally, they can earn rewards by providing up to date information about the sea conditions and any harbors they visit. None of this would be possible without the underlying blockchain-powered infrastructure upon which SeaCoast is built.
Decentralized apps like SeaCoast and Etherisc are examples of how the pace of innovation in DeFi is moving far faster than it is in traditional finance. This is due to the built-in advantages of DeFi infrastructure. Whereas blockchain is open-source and accessible, the underlying ledgers used in legacy finance are neither open nor developer friendly. Added to this is the tough regulatory environment that developers of traditional financial tools must work with, which doesn’t exist in DeFi. It’s not difficult to see why DeFi is not only moving faster, but is in fact already far ahead of what it’s trying to replace.
Admittedly DeFi is not perfect. The infrastructure is still nascent and it’s yet to come anywhere close to mass adoption. Critics say DeFi is risky too, pointing to its experimental nature and the existence of scams and vulnerabilities that result in investor’s and user’s funds sometimes being lost. This is exacerbated by the fact there’s no centralized bank to refund users.
That said, it’s also clear that traditional finance is far behind DeFi on the innovation curve. It’s slow, outdated, inefficient, hard to access and incredibly limited in what it can offer to users. Even if traditional finance does find a way to modernize itself and eliminate the unnecessary regulation that strangles its growth, the lack of an open infrastructure to build upon means it will never be able to catch up with the cutting-edge applications being built on blockchain today. This is why developers are so bullish on DeFi, because it allows financial services to evolve in ways that many never thought would be possible