Updated March 19, 2021
The Information Age continues to deliver stunning advances to every facet of modern society. The parabolic rise in technological innovation is now poised to completely transform finance and the old-world banking system. In a few short years, “decentralized finance,” or “DeFi,” seems certain to change the world through rapidly advancing improvements in computerized blockchain technology. Technological innovations in finance will render inattentive businesses woefully unprepared to compete in an era of economic uncertainty.
On February 5th, the Federal Reserve Bank of St. Louis published a concise explanation of decentralized finance. The article by Fabian Schar can be read here: “Decentralized Finance: On Blockchain- and Smart-Based Financial Markets.”
State and federal government actors appear to understand the inevitable economic efficiencies promised by decentralized finance and associated cryptocurrencies. The disruptive forces these technologies may deliver to traditional financial systems and mismanaged economies cannot be understated. Governments and businesses which fail to understand the inevitability of a faster, more efficient and transparent financial system risk economic disruption and a loss of competitiveness on a grand scale.
Resources for Understanding Decentralized Finance
- What is DeFi?
- The Future will be Decentralized
- A Beginner’s Guide to Decentralized Finance (DeFi)
- Smart Contracts and Decentralized Applications (DApps) – MIT
Prominent DeFi Blockchains
Ethereum, Cardano and Polkadot comprise the three leading blockchains poised to revolutionize finance.
Ethereum is an open-source blockchain with decentralized smart contract capabilities. Ethereum is presently the world’s most actively used blockchain. The project enjoys first-mover advantage following its network launch in 2015.
Ethereum presently operates as a “proof of work” blockchain. The Ethereum blockchain is slow, expensive to transact in, and lacks scalability in its present form. For this reason, founders plan a major upgrade with Ethereum 2.0. Ethereum 2.0 offers faster transaction speeds with its unproven “proof-of-stake” concept. Developers plan to implement the “Ethererium Improvement Proposal (EIP) 1559” in July 2021 to reduce transaction fees as a short-term fix before the blockchain converts from proof-of-work to proof-of-stake consensus security.
On February 10, 2021, Ethereum 2.0 hit a milestone with 3 million ETH coins worth an estimated $5.4 billion staked on the blockchain. (Martin Young, 2/10/21) Many large investors like the Grayscale Ethereum Trust continue to forecast a successful future for decentralized financial projects on the Ethereum blockchain.
The Cardano blockchain offers the primary challenge to Ethereum’s present DeFi dominance. Cardano’s founders methodically plotted its development course to achieve scientific validation from academic institutions and the world’s top cryptographers before taking its Shelley mainnet live on July 29, 2020.
Cardano developers utilize a methodical evidence-based approach to their computer science innovations. Cardano developers act only on peer reviewed research before rolling out each phase of the project.
Cardano successfully deployed the first phase of its Goguen smart contract platform on March 1, 2021. Goguen’s elegant programming language is crafted to allow business experts with no previous technical knowledge to create financial smart contracts. (See Goguen)
Charles Hoskinson leads Cardano’s development strategy. Hoskinson predicts that Cardano’s superior technology will triumph over Ethereum. (Jake Simmons, 2/6/2021) Hoskinson predicts that Ethereum 2.0 is bound to disappoint due to unsound choices underlying its scaling and governance.(Id.)
Cardano project managers expect DeFi developers presently operating on the Ethereum blockchain to expeditiously migrate to Cardano once Goguen goes live. SingularityNET, for example, announced its intentions to move to Cardano in October 2020. (Samyuktha Sriram, 2/10/2021) CEO Dr. Ben Goertzel noted that Cardano is “just a technologically superior blockchain platform.” (Id.)
Cardano is widely viewed is the cutting-edge smart contract technology. To thwart Etherium’s first-mover advantage, founder Charles Hoskinson plans to focus heavily in bring Cardano’s innovative technology to the African continent. Mr. Hoskinson touts Cardano as the vehicle which will propel countless millions of people to a better life. (See Here).
“Polkadot describes itself as a next-gen blockchain protocol that connects several specialized blockchains into one unified system/network.” (Ivan On Tech, 9/10/2020) Polkadot attempts to introduce scaling innovations to blockchain technology through the use of parallel chains or “parachains” for greater speed and efficiency. Curve Finance, one of the largest DeFi players on Ethereum, recently announced its intent to make its way to the Polkadot blockchain. (William Foxley, 2/9/2021) Ethereum users regularly cite high transaction fees (gas) as a primary reason for migrating to another blockchain.