What is a DeFi innovation

DeFi is the abbreviation for Decentralized Finance, a technology created to change the existing financial ecosystem.

DeFi innovations are mainly based on the Ethereum network, and on smart contracts based on blockchain. The DeFi ecosystem has grown in the shadow of the Bitcoin boom and cryptocurrency craze, even though DeFi innovation has never gotten the same attention as the cryptocurrency.

In the simplest way possible, DeFi innovation aims to replace existing financial services with more accessible services. At the same time, however, DeFi innovation seeks to make financial services significantly more efficient, safer and more reliable.

This is done through the use of decentralized technologies and mainly technology blockchain. In addition, it should be emphasized that the technology blockchain it is already becoming the norm in business. 

Countless billion dollar companies are actively exploring the possibilities of blockchain or are already implementing the technology. 

DeFi aims to completely replace banks with decentralized solutions that connect customers directly, openly and easily. Additionally, these DeFi innovations will be open to all, which is why some call DeFi “open finance”.

What are the benefits of DeFi?

The most significant advantages of DeFi technology are essentially three:

• Immutability
• Programmability
• Interoperability

These terms may seem difficult to understand, but they are actually quite intuitive. Furthermore, they are at the heart of understanding the benefits of DeFi innovation.

Starting fromimmutability, this refers to the fact that information in a true DeFi system is immutable. This means that no one can alter or tamper with the data, or information, contained in a DeFi system.

This is made possible by leveraging distributed ledger (DLT) technology as one blockchain. The decentralized nature of such a system means that no single actor holds the data. Subsequently, an actor cannot alter the data, increasing both the security and the ability to control the data.

La programmabilityinstead, it’s about the functionality of a DeFi system. DeFi solutions rely on “smart contracts”, which users can program to automatically execute when a specific condition is met. This increases trust, as neither party can alter an agreement.

Finally, theinteroperability of DeFi systems derives from the Ethereum network behind most DeFi solutions. This common software stack and Ethereum’s composability mean that both decentralized applications (dApps) and DeFi protocols can be integrated with each other. As such, it represents a truly interoperable system. 

Innovative definition

Proponents of DeFi and blockchain technology in general would readily argue that all DeFi solutions are, by their very nature, innovative. Looking at the innovative definition of Oxford Languages, it turns out that it is something that “contains new methods; advanced and original “.

Taken literally, it could be suggested that this means that every DeFi solution is, to some extent, an innovation. 

At the same time, some DeFi projects consist of “more” innovative DeFi solutions than others. For example, simply transferring an existing financial function to a DeFi setup can certainly be a great way to make it more resilient. Decentralized infrastructure is always preferable to centralized infrastructure.

The advent of innovative DeFi projects offers an opportunity to rethink the rules. Modern technologies offer greater freedom in designing new solutions that are, in many respects superior to existing ones, with the right vision and technical know-how.

A truly innovative DeFi product is one that surpasses legacy financial services by being better and easier to use. Consequently, those looking to build a revolutionary DeFi solution should aim for a solution. 

Innovative DeFi applications

At present, there are already many DeFi applications for services typically provided by traditional financial service providers.

For example, DeFi solutions already exist that do everything from lending and lending to insurance, various trading protocols, decentralized exchanges and decentralized collateral platforms.

Additionally, stablecoins are making the benefits of DeFi and digital currencies increasingly accessible to cryptocurrency skeptics. Stablecoins are, essentially, digital currencies like cryptocurrencies, but without the considerable volatility of cryptocurrencies.

Types of stablecoins

Instead, stablecoins are pegged to the value of a fiat currency, cryptocurrency, asset, or basket of these things. This lower volatility means there is less risk to investors that the value of a transaction or price will change before the smart contract is executed.

As a result, the DeFi space is becoming more attractive to large corporations and investors as these types of solutions appear. While the growing maturity of the DeFi field is attractive to users, it’s also important to consider introducing more innovative DeFi applications.

There has never been a greater number of innovative DeFi applications on the market today. For example, there are DeFi lending protocols, such as  Compound , insurance solutions like Nexus Mutual, prediction markets like Augur, decentralized leveraged trading options like dYdX, and synthetic asset alternatives, including UMA.

All of these products are far more complex and innovative DeFi applications than simply providing cheap and fast international remittance transfers.

Socially innovative DeFi

Another whole subset of DeFi solutions is that of socially innovative DeFi projects. However, to fully understand the advent of socially innovative DeFi projects, it is first necessary to understand what constitutes social innovation.

Social innovations are those that improve society as a whole. This can cover a wide range of various topics. For example, it can come from improving things like health care, community development, people’s working conditions, education, or even happiness.

Put simply, socially innovative DeFi must be projects that truly improve society and the roles of the people within it. A DeFi solution that speeds up payments is interesting and will certainly make payments more efficient, but it is questionable whether it can be said to be a socially innovative DeFi project.

Instead, a project that qualifies as socially innovative must be a real turning point; a paradigm shift. Imagine a DeFi dApp that grants microfinance loans to those living in third world countries.

Although microfinance is far from a new concept, it still relies on existing financial infrastructure such as banks. Microfinance loans have been hugely successful in the Indian subcontinent over the past two decades. However, a prerequisite for this success was proximity to existing banks, which could provide microfinance loans. 

Sub-Saharan Africa, on the other hand, has no pre-existing banking infrastructure in the same way. This is partly why microfinance loans have yet to make a real breakthrough in many third world countries. True, the loans themselves often manage to lift people out of poverty. However, for starters, many do not have access to banks that can lend.

However, a DeFi dApp solution that truly grants openly available microfinance loans to those without access to traditional financial infrastructure would be a truly socially innovative DeFi product.

DeFi paradigm

Another socially innovative DeFi venture is the Paradigm DeFi project. Paradigm is a cryptocurrency investment firm, but is now expanding into the broader DeFi industry. Of course, this is due to the growing appeal of decentralized finance. 

In fact, even billion-dollar legacy companies and banks are developing their own DeFi solutions to stay competitive in an evolving financial landscape. Therefore, it should come as no surprise when a crypto actor like Paradigm decides to create a DeFi project as well.

Additionally, the Paradigm DeFi firm could also add significant benefits to those who wish to use DeFi dApps. First, the Paradigm DeFi project revolves around offering a loan protocol with predetermined interest rates.

This Paradigm DeFi protocol is known as the “Performance Protocol” and comes from Dan Robinson of Paradigm along with Allan Niemberg. The  white paper on the Yield Protocol  describes the project as a complete “chain loan with interest rate discovery” solution.

The basis of this DeFi paradigm is something known as “yTokens”. These yTokens act similarly to zero coupon bonds and the yTokens will settle at a specific future date in relation to the price of a particular asset. In practice, users can buy or sell these yTokens and actually lend or borrow the asset in question for a specified period. 

Users are able to effectively create yToken while depositing some form of asset as collateral. This means that anyone who buys the yTokens of this asset is similar to lending the asset in question. All in all, the Paradigm DeFi solution is another solution that takes a new DeFi approach to solving existing problems.

Ercole Palmeri