Decentralized Finance: Beyond Ethereum and Closed Financial Systems

As world governments rushed to tackle the COVID-19 crisis, many have resorted to imposing travel restrictions, lockdowns, and shutting down businesses and workplaces in an effort to curb the disease.

The economic consequences of such political decisions, especially for the poorest in society, are increasingly evident. In the United States, jobless claims hover around 800,000.

In Latin America, where 190 million people live in poverty, the IMF predicts that the region will experience the largest economic contraction in the world.

It remains to be seen how events will play out from here, but the 2008 global financial crisis offers some clues. As the prevailing economic climate worsens, banks become recalcitrant towards borrowers, loan flows dry up and loans are requested. Unscrupulous lenders take advantage of this, making hay even when the storm clouds gather.

In less solid economies, US dollar-denominated debts devalue the national currency, and even relatively wealthy people struggle.

For many, the bitterest pill to swallow is not the disease itself or any drug to fight it, but the economic wrecking ball of virus mitigation strategies.

A key difference, then and now, is bitcoin. It is widely believed that Satoshi Nakamoto developed cryptocurrency as a response to the latest financial crisis and the technology has matured significantly in the meantime.

Now technology has its chance to shine while once again the legacy financial system is upset to the core.

A stable store of wealth?

One of the prevailing criticisms of bitcoin is that it is incredibly volatile compared to more established assets. This may be an accurate assessment in the most stable and robust economies of the last decade, but less so in the rest of the world.

In countries like Brazil, Argentina, where currencies have shown significant volatility, adoption rates of around 16% tell their story. In Nigeria, the high cost of remittances has pushed a third of people towards cryptocurrencies.

The change in currencies can also play a role in the popularity of cryptocurrencies in developing countries. Users can easily acquire a wide variety of stablecoins pegged to major national currencies, including Tether’s USDT, Kava’s USDX and Circle’s USDC. Stablecoins also evade national capital controls such as those imposed by South Africa, which also has high cryptocurrency adoption rates.

An open financial system

Stablecoins also contribute to another significant development in the evolution of cryptocurrency: decentralized finance or DeFi for short. While some may dismiss it as a craze among Ethereum fans, with some advocates creating complex chains of debt and providing liquidity as “yield farmers,” there is a deeper and more complex picture that emerges when you look closer.

For example, DeFi can offer hope to the poor and non-banks. Over a billion people around the world remain excluded from traditional finance because they do not have a government-issued identity document.

With COVID-19 starting to bite, the risk of poor people turning to loan sharks or other unscrupulous lenders also increases. DeFi provides an alternative for banking and lending, and anyone with a smartphone and an internet connection can participate.

Two of the biggest players in the industry are Maker and Compound. In combination, anyone can deposit ethereum as collateral, issue a stablecoin loan, and stake it to earn interest.

Breaking the boundaries of Ethereum

DeFi has brought new challenges to the blockchain industry. Decentralized finance currently heavily relies on the Ethereum blockchain, with the increased workload slowing the network and making it more expensive.

The biggest problem with DeFi on Ethereum is this: it is based on the solidity of the unpopular programming language, it has periodically high fees, it is often overworked and overloaded.

Sometimes the Ethereum network struggled to process transactions for hours and the price to do so was exorbitant. Developing new blockchains in tandem with cross-chain technology offers a glimmer of hope that the Ethereum bottleneck may still have a pending solution.

More ambitious projects are now emerging that operate across more blockchains and with a wider range of features. There are obviously DeFi users who want alternatives to Ethereum, cross-chain technology or not.

One project that attempts to help cryptocurrency break free of its Ethereum addiction is PlasmaPay. Currently, an e-wallet for digital payments and e-commerce, as well as an exchange, the company aims to expand from their current offerings such as loans, loans and their wallet app. They see their 100,000 existing customers in over 165 countries as a real competitive advantage over other blockchain competitors aiming to serve the DeFi space.

Anyone can build financial applications, especially their own DeFi projects, on the top-level Plasma blockchain. Perhaps the key is that PlasmaPay is not only a fast (50,000 transactions per second) and free blockchain with no gas fees, it also offers the infrastructure for cross-chain liquidity transfers and global legal rails.

For a comparison on the bitcoin blockchain it costs from $ 2 to $ 4 per transaction, on Ethereum it can be anything from $ 2 to $ 15 USD.

On current smart contracts, DeFi can go as high as a few hundred dollars, depending on the complexity of the contract. Plasma doesn’t charge any fees for Dapps due to their proprietary blockchain design and Proof of Stake consensus algorithm.

Unlike most DeFi projects, they have chosen not to build on Ethereum. Think of it as the Apple Store, where distributed applications can be free. Apple provides the Apple Store infrastructure for free, just like PlasmaPay does for Dapps.

DeFi vs. traditional banks

When users decide to take advantage of DeFi loans, they will often find interest rates that are cheaper than those offered to them by banks or credit cards. For example, someone looking to borrow Tether’s USDT or Circle’s USDT can get interest rates up to 2.5% when using a DeFi protocol like Aave.

“For DeFi to truly deliver on its promise, it must end its over-reliance on a single blockchain. Just as the limitations of legacy banking have fueled the rise of DeFi, the limitations of the Ethereum network will accelerate the adoption of cross-chain technology. .

One way PlasmaPay will play its role in strengthening the industry is by providing the HyperLoop bridge protocol which suppresses overloaded networks. This way more people can enjoy the superior DeFi experience with higher interest rates and payouts to users, and break away from the outdated banking system that offers its customers very little in comparison, ”said Ilia Maksimenka, CEO and CO-Founder of PlasmaPay me in a recent interview.

“It is impossible to get as much return from savings account deposits in the central banking system as is possible with a decentralized banking system,” he added.

Even before COVID-19, the average loan interest rate in the US was more than double that level, making a DeFi loan a potentially attractive proposition.

The childhood of the DeFi industry means that any discussion about it should be tempered with caution. That said, the availability of an open and inclusive financial system during the onset of a global recession is an intriguing prospect, particularly for those most vulnerable to financial shocks. While we are on the verge of another global recession, the global pandemic could still be the tipping point that sees the world rush into the warm embrace of cryptocurrency, blockchain technology and DeFi.

(Disclaimer: the author is a PR consultant for PlasmaPay)