During the last years, fintech has been one of the main topics that dominate the debate of blockchain use cases. Blockchain in commercial financing has been a hot topic, as the Swiss and Australian stock exchanges are taking steps to incorporate distributed accounting technology.
However, within the blockchain and crypto community, the movement around decentralized finance or DeFi is rapidly gaining ground. One commentator predicts that DeFi will dominate the blockchain space this year. While the DeFi initiatives dominated the ETHDenver hackathon in February, highlighting that the Ethereum community is at the forefront of DeFi. So, what is DeFi and why is it so important for the cryptographic community?
To explain DeFi, we need to differentiate between the traditional financial landscape, fintech and DeFi. During the last decades, fintech companies like PayPal, Transferwise and Revolut began to invade the limits of traditional banking. However, both conventional banks and fintech companies are centralized. Either a bank or the company serves as an intermediary for transactions.
Bitcoin and other cryptocurrencies introduced the concept of decentralized peer financing, which is the backbone of the DeFi movement. Blockchain is often referred to as a fintech innovation. And distributed accounting books are being implemented in the financial sector. These are usually private accounting books or with permissions that do not take advantage of all the benefits of decentralization.
The DeFi movement focuses on creating a third way with a complete decentralized ecosystem of cryptocurrencies and tokens, bags, wallets and other financial infrastructure based on blockchain. DeFi is an opportunity to create a financial system completely different from the previous one. Which can exist together with traditional banks and financial technology companies without being integrated into them.
Who is involved
The DeFi movement has now come together in a more coherent community. Which shares the principles of remaining decentralized, open source and accessible to all.
Some of the largest projects in Ethereum are participating in the DeFi movement. MakerDAO is one of the largest with more than $ 280 million in ETH wagered on Maker chips as collateral to create the stablecoin DAI. Compound, which offers a decentralized money market protocol, has a value of approximately $ 4.6 million in ETH. While the Uniswap exchange protocol has approximately $ 3.3 million.
So far, and perhaps quite strangely, Bancor is a project notable for its absence in the DeFi conversation. Bancor is the second largest project in Ethereum, with $ 11.5 million chips bet. Since Bancor has recently integrated exchange swaps for EOS tokens, they total around $ 13 million in tokens posted by 140 liquidity providers, if EOS is also included.
Taking into account that the DeFi movement cites interoperability, accessibility and financial inclusion as part of its fundamental values, it is still surprising that Bancor is not at the forefront of the discussions. The central premise of the company is to become a decentralized network of inter chain liquidity, which is exceptionally well related to the established principles of DeFi.
By ensuring continued liquidity in the chain among blockchain based assets, Bancor aims to redesign the way people create and share value.
How does Bancor guarantee continuous liquidity?
Conversions in Bancor are executed against chain liquidity groups using intelligent contracts to assess and process transactions without order books or counterparts. Currently, all liquidity funds in Bancor are created based on 50% of a token type based on ERC20 or EOS and 50% of Bancor’s native BNT token.
The liquidity set of each token acts as a counterpart to the conversions in the network. When someone wants to make an exchange, they deposit their ERC20 or EOS cards in the Bancor network. The network converts the token into BNT and then delivers the desired token to the user.
Conversion of chips in practice
To understand how symbolic conversions are valued and processed in Bancor, let’s look at a simple example of a network consisting of two liquidity fund, Enjincoin (ENJ) and Decentraland (MANA). For simplicity, suppose that ENJ, MANA and BNT have an initial value of $ 1 each. The following steps will allow the user to convert their MANA into ENJ.
Users send a MANA token to the MANA token relay, which increases the MANA source in the relay to 11 MANA. The MANA relay sends a BNT, which reduces the supply of BNT to 9. This creates an unbalanced relay. To balance it, the Relay decreases the price of the sold MANA chip, setting its price using the new chip balances of Relay 9 (BNT) / 11 (MANA), which now equals $ 0.81.
The withdrawn BNT is automatically sent to the ENJ relay, which increases the supply of BNT within the ENJ relay to 11 BNT. The ENJ relay sends an ENJ token to the user, which decreases the source of ENJ to 9. This once again creates an unbalanced relay. To balance it, the relay increases the price of the purchased ENJ to 11 (BNT) / 9 (ENJ) or $ 1.22.
All these steps take place under the hood. From the user’s perspective, they simply see an instantaneous conversion from MANA to ENJ, which is securely registered in the chain. As shown above, the value of tokens in Bancor varies according to supply and demand, so users know that they are always getting a fair price in the market.
Bancor and DeFi: The perfect marriage?
Unlike centralized exchanges, such as Binance or Coinbase, exchanges in Bancor do not have custody. The network does not maintain its cryptographic assets, while the use of cryptographic exchanges entails the risks inherent in allowing a third party to control their funds. This places Bancor in the position of being a truly decentralized financial innovation, aligned with the principles of DeFi.
In addition, Bancor decided to base its liquidity network on BNT, which is not linked to any block chain. Using BNT is the most efficient way to enable convertibility and liquidity in block chains.
In the future, Bancor anticipates that more platforms can be integrated into the network, which means that users can easily convert between tokens in different blockchains. This interoperability also plays with the principles of the DeFi movement.
While 2018 was the year everyone talked about blockchain as the next generation of fintech, 2019 is the year of DeFi. The digital financial economy is becoming a self-sufficient ecosystem through innovations such as Bancors Liquidity Network and Makers DAI stable coin. It’s an exciting time for decentralized finance.