2021

August 2021

Posted by Anton Murray Consulting on . Posted in 2021

The benefits of blockchain technology are relatively well known, but the technology has evolved in the cryptocurrency space to give us Decentralised Finance, or DeFi. DeFi utilises the immutable ledger and shared access of blockchain technology to easily facilitate transactions such as lending, interest and exchanges without the need for intermediaries or traditional middlemen such as banks. Simply put, DeFi alters the traditional safety and cost of financial institutions to enable actors to engage in transactions and relationships without the added cost layer that those traditional players add to the process. The perceived safety of institutions is in this case replaced by the perceived safety of the immutable ledger technology of blockchain. To break it down even further, DeFi is like an ecosystem for cryptocurrencies, and will soon include other digital currencies and tokenised assets.

The complexity of available DeFi applications and the vast amount of them adds to both their popularity and excitement as a new form of financial technology but also to the risks they expose to consumers and investors. One risk associated with DeFi is the potential volatility of the crypto assets used as collateral. This is a problem for all things crypto as we have seen with the price surges and troughs of Bitcoin and Ethereum. DeFi applications also utilise smart contracts that involve code that underpins the operation of each interaction or application. This code can be compromised or not written correctly creating a risk to consumers using the DeFi application attached to it.

This sector is largely under or un-regulated by traditional financial markets and government regulators. This can prove to be a dangerous hunting ground for investors in DeFi technology, and likewise DeFin participants eager to participate in the emerging DeFi space. While further regulation is certainly pending, the benefits of DeFi are clear and interest in the application of DeFi concepts continues, in Australia and beyond. There is a local appetite for blockchain​, and Australian start ups are exploring the DeFi space. Most notable is the “father of modern agriculture” Kain Warwick’s Synthetix which has nearly $1.6bn invested in it. And RocketPool is a local “a decentralised, trustless and community owned staking protocol designed for ETH2” making waves down under. It is encouraging to see entrepreneurs in Asia-Pac explore the DeFi space, in a rapidly evolving area that is keeping regulators on their toes as DeFi technology and peer-to-peer trustless lending is starting to challenge the traditional financial market intermediary banking sector.

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