Demystifying DeFi

What is Decentralized Finance (DeFi)?

DeFi or Decentralized Finance refers to a host of financial applications built on top of blockchain networks. It is a step towards truly creating an open-source, permission-less and transparent financial service ecosystem that anyone and everyone can use without a central authority. The end users would have full authority and control over their assets and interact using DAPPS (Decentralized applications). DeFi’s biggest allure is the true democratization of financial services, especially for the unbanked.

Its main tenets are that it is:

  • permissionless
  • censorship-resistant
  • final and fluid
  • programmable

DeFi apps rely on stable coins and digital assets, like DAI or USDC and Ethereum. DeFi’s main improvement on FinTech is that it brings the same concept of Lego blocks to financial applications, giving them the moniker of Money Legos. In other words, the DeFi ecosystem makes it possible to take out a loan on one platform, perform a leveraged trade on another, and exchange it back to the base asset through a decentralized, blockchain-enabled exchange. As a result, composability enables DeFi to have a wide range of use-cases where it outperforms its traditional counterparts. The composability feature enables stacked functioning, and refers to the ability to re-connect different applications built on blockchains, like Ethereum.

Advantages of DeFi

Traditional finance relies on institutions such as banks to act as intermediaries, and courts to provide arbitration. 

“The biggest advantages of DeFi is that its permissionless to participate (no KYC, credit score, etc.), same rules apply to everyone, liquidity is ’borderless’ (you can access the market from anywhere & anytime as long as you have internet), and it’s non-custodial so you have full control over your money and you can use it however you want.”

  1. Smart contracts specifies how the platform functions and manages disputes. The use of smart contracts ensures that DeFi solutions are low cost and easy to use.
  2. Built on blockchain, it embodies all the benefits of blockchain networks including elimination of a centralized point of failure.
  3. Because DeFi is an open ecosystem, it’s access is easy for individuals such as low income communities, who under normal situations would not have access to financial services because it doesn’t benefit the intermediaries.

Risks involved in DeFi

The greatest security risks which DeFi industry must deal with are:

  • Lack of data – Data collection methods in DeFi are still being developed, but the nature and complexity of available data has increased significantly in recent years.
  • Requirement for monitoring transactions – DeFi applications need more comprehensive checks to ensure transfers to the right addresses.
  • Compliance issues – The DeFi ecosystem needs regulatory bodies to provide greater support in case of price slippages and regulatory scrutiny. Organizations are emerging to provide better earlier support and one click regulatory solutions.
  • System Failure – Since the DeFi ecosystem is not fully established, users need to minimize the risk of potential failure. The last step towards this goal is the financialization of risks through insurances and verified smart contracts.
  • Hacking – Since DeFi projects have proven to be successful hacking targets, the DeFi industry is developing sandboxes and clear frameworks for dispute resolution.
  • Asset price information – By auditing smart contracts, the DeFi industry is trying to provide ways to detect and solve bugs quickly.

Difference between DeFi and open banking

Open banking refers to a banking system where third-party financial service providers are given secure access to financial data through APIs. This enables the networking of accounts and data between banks and non-bank financial institutions. Essentially, it allows new types of products and services within the traditional financial system. 

DeFi, however, proposes an entirely new financial system that is independent of the current infrastructure. DeFi is sometimes also referred to as open finance. For example, open banking could allow the management of all traditional financial instruments in one application by drawing data from several banks and institutions securely. Decentralized Finance, on the other hand, could allow the management of entirely new financial instruments and new ways of interacting with them.

Decentralization is not a universal answer to all problems. It is important to identify use-cases that would benefit from the tenets of blockchain.

Potential use cases for DeFi

1. Trading

Decentralized exchanges are variations of traditional exchanges. The difference is that decentralized exchanges do not require complete custody of an asset – the original owner can maintain custody. Orders are settled directly between wallets in a matter of minutes which means the traded cryptocurrency will be in the user’s wallet without the need to first transfer the assets to the exchange. The upside of this is that unlike certain centralized exchanges, decentralized exchange users are less vulnerable to losing their funds due to a hack or the exchange vanishing with their money. However, that does not mean they are entirely fool proof, as faulty pricing data have caused losses for users.

2. Lending & Borrowing

DeFi allows users to lend and borrow directly, removing a banking intermediary from the entire chain. Balance verifications are based on a blockchain, assets are transferred to a smart contract, and interest rates are deducted without human intervention once the conditions are set.

Loans in DeFi are typically used by margin traders, who give their cryptocurrencies as a collateral. As long as they are able to pay the interest rate and maintain the collateral requirements of a loan, they do not have to rely on a third party to have access to a lending facility.

Non custodial lending has now been made available through collaborations with wallet providers. Over time, other digital assets like IP rights or digital art, could also be used as a lending instrument. The high demand for digital lending today makes the yield or return on investment for individuals leaving their deposits in DeFi platforms – considerably higher than the interest offered by traditional banks, but not without some extra risks

3. International Remittance

Stablecoin based payments have handled over $220 billion worth of assets on blockchain. According to the World Bank, global remittance volume for 2018 was around 620 billion. Stablecoin based payment adoption will enable businesses and individuals alike to receive money from anywhere in the world in under ten minutes for a fraction of the cost of traditional payment relays.

4. Provenance & Ownership

Verifying the source of a document or ensuring a claim of ownership over a digital asset is hard in legacy markets, largely due to their centralized systems. The mutable nature, which means they can be retrospectively changed, of traditional documents, make them easy to forge and, more importantly, difficult to verify. Blockchains offer an alternative to this with Non-Fungible Tokens (NFT) and fractional ownership. Non-fungible tokens are tokens that cannot be divided into smaller fractions or reproduced. They. are used to represent tickets, gaming passes, or even in-game art. The token itself represents ownership of the asset. Fractional ownership makes it possible for individuals to own a smaller portion of very costly assets. This is common in the case of vintage cars, highly prized real estate, and artwork. The asset ownership is proven by individuals or agencies through regional attestation bodies, then issue tokens that represent part-ownership of the asset. Individuals can then trade the fractional tokens with one another os the perceived value of the asset changes. Regulations around this are not entirely clear yet.

Create a sound business strategy

Strategy is an overused term these days and the foresight in most cases is limited. When confronted with revenue growth, most companies focus on expansion into new geographic markets. Heard the age old saying numbers don’t lie ? A look into the financial model would reveal the the impact of such decisions and the growth metrics that the company would gain rather than just relying on instincts.

One mistake most business CEOs and startups in particular make is to utilize off-the-shelf strategic templates in a bid to realize quick results as they are usually time starved and stressed. But the results are usually disappointing as the outcomes are short-sighted and usually tactical rather than strategic in nature.

Below is a step by step method of developing a business strategy.

Developing a business strategy in 10 steps

1. Define and embody your true north

This is termed a BHAG (Big Hairy Audacious Goal) or your grand vision or purpose. Term it however you like, but it is what your business is set out to do and the reason why it exists. The true north should consider what success means to the company, its customers and the environment that includes market and economy. w Vision is an abstract word that means different things to different people.

2. Define your USP

Your strategy has to take into account your customer and how you deliver value to your customer that is unique from other competitors in the marketplace. You don’t want to swimming in a red ocean. Your strategy should look into how you can differentiate yourself either in terms of service quality, delivery models, pricing, product innovation etc.

3. Be specific about your target audience

Without understanding your customer and defining the right target audience, the chances are you are going to shoot in the dark or spread yourself too thin to see any tangible results. This results in poor sales, inefficient marketing and overall business failure. Defining the audience and focus area helps channel your resources and energies on delivering true value. By defining your revenue operations and integrating sales and marketing, you increase your chances of success.

4. Monitor for growth

If you aren’t growing and your growth trend is a flat line or worse, declining; you have to be really worried. Growth is essential to be able to invest into people, processes and technology. Growth can be defined in terms of revenue, technology innovation, R&D etc. The area you want to focus on is dependent on the nature of your business and which area delivers the goals you’ve set for the company. Be defining the areas of focus, it gives the business the clarity in terms of budgets it needs to allocate for various resources.

5. Data ! Data ! Data – Use them for decisions

Do you use your gut alone to make decisions or couple it with data? And is that data credible and useful ? Your strategy is as good as the data you use to make decisions. Tracking data and knowing what data is important to monitor is critical to helping business CEOs understand their business better and steer it in the right direction.

Business CEOs need to look into data about every function of their business and derive meaningful information rather than be perplexed by the swarm of data. Business dashboards and visualization tools can help you take informed decisions.

6. Don’t underestimate your results for the long term

We usually make the mistake of over estimating the results that can be achieved in the short term and under estimating what we can achieve in the long term. Businesses tend to make short term plans as the current markets are very dynamic. Consider the risks involved from political, economical, social, technological, legal and health perspectives and plan in mitigation into your strategies. Great companies treat strategies as an annual exercise making it long term yet giving them the ability to evaluate and tweak it periodically.

7. Pick your strategy team and invest time

If you want your managers to take strategy seriously, make them do their own research and prepare relevant information in advance of your strategy meetings.

8. Evaluate the performance periodically

A strategy is only good if it is executed well. It’s recommended that the strategic plan be reviewed and tracked monthly or quarterly. As the strategy covers various functions of the organization, key executives in charge of departments need to take ownership to execute the plan.

A great way to track the progress is using KPIs that help track the current progress and forecast the track to achieving the goals using leading metrics. Ensure that the goals reach all departments and that every person in your organization can relate to it and be clear how they contribute to achieving it.

It’s easy to set and forget unless you put it onto a calendar. This way you can keep track of the progress periodically and promote effective and more productive meetings. Strategy may start at the top as its a senior executive responsibility but needs to encompass the entire organization and keep the team set on the overarching goal.

Cutting Carbon Emissions

Every year governments and private investors meet to make a commitment to fund clean energy research. I recently watched a paradoxical documentary on how the so called green companies are in-fact not truly green and it really opened my eyes towards how stuff is being manufactured. Energy alone isn’t a factor affecting how much carbon we produce.

There’s a book I’d recommend reading titled “Sustainable Materials with both eyes open” led by researchers Julian Allwood and Jonathan Cullen. Half way through, I started skimming through it because of the sheer volume of data, but it still was quite conclusive in its assessments. The book focuses on the five materials accounting for more than 50% of the world’s industrial carbon emissions; namely steel, cement, paper, plastic and aluminium. Steel is heavily utilized in construction and the demand has been increasing at an exponential rate. However, producing steel puts a strain on our natural resources in addition to affecting climate change.

Sustainable Materials - With Both Eyes Open (Without the Hot Air) by  Allwood, Julian M., Cullen, Jonathan M. (April 1, 2012) Paperback:  Amazon.com: Books
Is there a sustainable and efficient way to manufacture these materials without destroying the environment?

It isn’t about efficiency but more about effectiveness of the process. Efficiency gains alone will not help us reduce greenhouse gas emissions. The problem the authors describe in their book is of the growing demand exceeding the rate of reduction of carbon emission through efficiency gains. which the authors attribute to looking “with one eye open”. We need to also think about how to utilize lesser material as well and consider more sustainable, long lasting products that can be recycled and reused. By looking with both eyes open – using less material and producing more sustainable products, we can make a better impact in combating climate change.

Can we really reduce the use of materials ? 

In the book, the authors cite an example of how some materials in buildings or cars when discarded are still usable. However it is overlooked. Recycling expends energy in contrast to reusing. If you throw out your old refrigerator, the steel is probably still in good condition. But scavenging usable components isn’t practical. This is where technology can assist us in tracking product history and match supply with demand.

But matching up buyers and sellers is hard. Who has the time to look around for someone who might want pieces of your old refrigerator? This is an area where technology can help by tracking product history and matching supply with demand. New construction tech that allows dismantling buildings is a step forward in this direction.

We can continue living th way we do or change now. We owe it to the future generations.

What is the difference between 7D, 6D, 5D, 4D and 3D Holography / Holograms?

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The simple answer – MARKETING!

It has no realistic meaning. It is simply meant to get the attention of the soon-to-be-perplexed. All marketing, little to no substance.

Each dimension is a way of seeing or sensing something.

1D  (one dimensional) is mostly a theoretical idea or the domain of the very small world of quantum mechanics.  Everything we can see has 2 dimensions. Even a very very thin long line has at least some width.

2D a flat representation of a scene or object.  its size can be described as height and width. Like a square, picture  or image on a standard TV.

3D a recreation of an object or scene in three dimensions.  So height, width and depth like a cube or sphere. We have two eyes so we have great depth perception and experience the world in 3D

4D is basically 3D plus movement over time. So Time is the fourth dimension

5D and above are not viewable or detectable by us in our Universe. These extra dimensions are the playground of fiction authors and theoretical physicists.

String theory predicts our block of 4 dimensions are only a small group of a much larger group of dimensions.  This does not mean that there are perfectly formed replicas of the universe we can detect with alternate versions of us and different histories played out.  If there are multiple dimensions outside of our own and we could never interact with them in any way then they might as well be not there as far as we are concerned on a daily basis.  Of course we are a curious lot and we can’t stand being told no, so lots of theoretical scientists, authors and BS artisans are actively exploring the possibilities of the extra D’s. Each dimension is a way of seeing or sensing something.

4D , 5D, 6D are mostly marketing terms for tech that cannot sell on its own merits.

So the next time you go looking around for 7D holograms, please read this first.