By Vanessa Malone
Decentralized Finance, or DeFi, refers to financial smart contracts and applications (dApps) deployed on a blockchain, most commonly on Ethereum.
The goals of these dApps are to flip traditional financial applications on their heads and “defy” the current infrastructure by developing their decentralized and non-custodial counterparts.
Instead of relying on a central entity to complete a transaction, digital contracts automatically execute transactions person to person once the established parameters are met. These transactions are labeled ‘non-custodial’ because the individual maintains control of their assets’ movement instead of electing to have a central entity move the assets on their behalf.
The DeFi surge has put a spotlight on decentralized cryptocurrency exchanges to support these tokens. Interestingly, the majority of today’s cryptocurrency exchanges are centralized despite decentralization being a core value of the blockchain community.
There are many reasons why, but centralized exchanges are typically more userfriendly with more efficient fiat on-ramp/off-ramps. In exchange for simplicity, traders give up control of their private keys, but the recent DeFi surge is pushing users towards decentralized exchanges.
The demand for greater transparency, accessibility, and control is prevalent across traditional financial markets as well. We’re seeing the rise of decentralized ‘cryptocurrency’ exchanges, but how about the rise of decentralized ‘stock’ exchanges?
Bringing DeFi to the traditional securities
Horizon has built decentralized exchange technology to support traditional securities with the core values of DeFi intact. The product is built to cater to the masses by keeping the unfamiliar term “DeFi” in the background, and pushing the actual benefits for issuers and traders to the forefront.
The first use case of this technology is Upstream, the first global exchange and trading app for crowdfunded securities announced last week. Upstream is a joint venture between Horizon and MERJ Exchange expected to launch Q1 of 2021.
Upstream offers an investor-driven marketplace with best bids and offers secured using the Ethereum public blockchain. It is paired with a retail trading app where investors of all levels can buy, sell, and settle securities directly from the Upstream trading app.
How the technology behind Upstream integrates the core values of DeFi
- Giving full control to the investor. Blockchain enthusiasts know the phrase “not your keys, not your coins.” This applies to the traditional securities market as well if you replace “coins” with “shares.” On Upstream, investors will hold their securities on their phones while controlling any and all movement. This is critical as most other trading accounts in both cryptocurrency and traditional markets create “central” honey pots of assets susceptible to hackers. In October, Bloomberg reported almost 2,000 Robinhood accounts were compromised in a hacking spree. Some account holders complained that hackers liquidated their investments and withdrew balances. On Upstream, all transactions are biometrically verified and cryptographically signed using Ethereum, adding increased investor protection from dangerous hacks. We empower the investor to manage their securities as simply as they would manage their bank accounts and other payment applications.
- Decentralized, but with guardrails in place to protect investors. There are varying degrees of decentralization when it comes to DeFi services. Some die-hard crypto enthusiasts are all for complete decentralization, but if the assets you own can be robbed with impunity, what’s it all for? There simply are benefits to having protections in place that leverage traditional financial guardrails. For example, Upstream’s integrated KYC technology enables investors to verify who they are and have their securities returned to them if a private key is lost, stolen, or forgotten. In short, securities are stored in a user’s smartphone wallet app and are protected by a users private key. The technology behind Upstream integrates with a regulated custodian engaged by the securities issuer so that a parallel record of all asset ownership can be maintained by a regulated entity. This way, in exceptional cases, assets can be lawfully restored to their rightful owner by the issuer’s custodian.
- Open finance. The majority of financial services are controlled by central parties today. Whether it’s money transfers, asset purchases, or lending, you typically must go through an intermediary. Ethereum-based financial services instead connect peer to peer and allow greater access to basic financing. While many DeFi projects can go over the general publics’ heads, Upstream is designed to look and feel like traditional public marketplace with an intuitive interface. Upstream also features transparent pricing and market activity. We believe this works to create an honest and accessible marketplace while leveling the playing field for the everyday investor.
The ethos behind DeFi isn’t just unique to the cryptocurrency subsector of fintech. It is spreading to other areas of traditional finance and we believe that deploying use cases that keep DeFi in the back, and tangible user benefits in the front will help fuel adoption.
Horizon is a fintech company that builds and powers global securities exchanges with an integrated suite of software for compliant issuance, management, and secondary trading of securities. Our in-house solutions combine Wall Street and Silicon Valley to power the next generation of securities offerings and trading in the U.S. and globally. Learn more at https://www.horizonfintex.com/.