#DeFi / Defi’s Rise Is Inevitable, and Fusion Is Driving This Evolution of Conventional Finance

Four billion dollars. This is the total amount of funds locked in “Defi”, growing from just one billion USD in 6 weeks.

“Defi” stands for “decentralized finance”… “Defi”, in short, is the use of blockchain technologies (including smart contracts, decentralized asset custody, etc.) to replace all “intermediaries” with program codes, therefore maximizing the efficiency of financial services and minimizing costs.

… “Defi” can be classified into four categories.

[1] Decentralized loan

Perhaps what came to mind for you is the infamous “P2P” lending. Whilst peer-to-peer loaning is well-intentioned, with the aim to simplify the lending ecosystem and thus reduce the intermediary cost… [it] still relies on centralized intermediaries and is susceptible to risks associated with centralization in a market that lacks regulation…

Using “Defi” technology, we can build smart contracts with codes that execute the actions of intermediaries, including: accepting and managing deposits, handling collateralized loans, and liquidating collateral assets as per the terms of the contracts should their values fluctuate. Thanks to blockchain technology, the contract codes cannot be manipulated or terminated by any individuals or organizations, and are executed with pre-defined terms.

MakerDAO and Compound are two examples of “decentralized loans”: they establish capital pools that can lend out assets via smart contracts… Interestingly, once a smart contract is up and running, even the project developers cannot take funds away from the capital pool.

[2] Decentralized exchange..

“Defi” brought us non-custodial exchanges, where codes (smart contracts or decentralized key management systems such as Fusion’s DCRM) hold assets from both parties in escrow. Those codes from decentralized blockchains guarantee the asset swap is atomic. That means when you make a transaction with a party, assets are guaranteed to be transferred to each other and the cost of making such “non-custodial transactions” is nearly zero.

[3] Programmable standardized decentralized derivatives

The financial derivatives we see today are designed and issued by centralized financial institutions… [While] Everyone can issue derivatives and set their parameters with “Defi”. Due to its decentralized characteristics, derivatives with identical parameters but with different issuers do not have any risk differences… By setting the same parameters, different people can create homogenous derivatives… digital acceptance bills no longer need to be redeemed from a centralized institution such as a bank; the blockchain consensus guarantees the bill will automatically become digital cash when it is due.

[4] Financial process automation

… finance has not been fully automated, and the root cause is trust. How can you accept the fact that your money is controlled by someone else and can be transferred away from your account automatically? Even in scenarios that require highly efficient automation, we still need a centralized entity to ensure the safety of funds… Assisted by other fintech companies, banks currently offer some services that meet the above-mentioned demands… “Defi” has a strong advantage in this area. Smart contract templates can generate flexible smart contracts for payment distribution and bill collection based on the digital signature dynamics of various accounts… The cost is also close to zero.

With the advancement of “Defi”, future financial institutions may become “coding factories”, accounting firms will lose their clients unless they start conducting on-chain data analysis and “Defi” smart contract code audit.