The Ethereum community has conspicuously branded itself as the blockchain for DeFi crypto, which is short for Decentralized Finance. Even in the earliest conceptions of Ethereum, it was meant to be the platform that would herald in a new way economic agreements and transactions were completed. Vitalik Buterin, one of the authors of the original white paper, was talking about new ways to arrange financial transaction as early as 2013 when he first proposed Ethereum.
Bitcoin was seen as a major technological breakthrough, allowing for trustless peer-to-peer payments globally through a simple internet connection. While the groundbreaking nature of the Bitcoin blockchain cannot be overstated, it still did pose limitations in certain areas.
Ethereum represented taking the concept of trustless financial transactions to the next level. It broadened the scope beyond simple payments and allowed for more complex financial arrangements. Instead of “trustless payments”, Ethereum would allow for “trustless agreements”, which would mean users could insert stipulations and contingencies into crypto transactions, much like paper contracts do in fiat transactions. This is why they are called smart contracts. Smart contracts are essentially computer code that will automatically execute a transaction once certain conditions are met, thus eliminating the need for trusted intermediaries, such as banks.
With the implementation of smart contracts on top of a trustless payments system, alongside the ability to easily issue new assets, Ethereum set the stage for a new era of DeFi. And, at the very center of it all would be its native cryptocurrency, Ether (ETH). Here are few examples of how Ethereum brought innovation to traditional financial products:
DeFi Crypto Lending
The unique technology of the Ethereum blockchain positions it as an ideal way to introduce a new decentralized form of lending. Leveraging smart contracts and permissionless platforms for financial products, Ethereum-based projects offer lending services that both borrowers and creditors can take advantage of.
As such, Ethereum is far and away the most popular blockchain to provide lending services on. Not only is its native cryptocurrency, Ether, one of the most used currency for crypto loans, but several other cryptocurrencies issued on the Ethereum blockchain have the highest volume of crypto loans originated. These include cryptocurrencies such as Dai, USDC, and ZRX.
Dai and USDC are both stablecoins that are meant to be pegged to 1 US Dollar. ZRX is used as a utility token that powers many different decentralized exchange platforms.
Stablecoins are the most used type of currency for crypto loans because they give borrows more options. Dai consistently accounts for more than 70% of all crypto loans. For instance, many traders and investors take advantage of stablecoin loans because it allows them to do things such as use leverage, short assets, and mitigate volatility risk.
Some of the top platforms to borrow and lend cryptoassets are Maker, Compound, Dharma and dYdX. While these platforms differ slightly in terms of assets offered, interest rates, and overall functionality, they all allow for permissionless access to credit and other interest-earning services. Anyone can take out a loan or lend out their crypto without having to provide personal information of any kind. There are no banks involved and all assets are control by the customer, not the platform itself.
These platforms essentially function as a loan market place but the platform itself isn’t taking a middlemen fee because it is using open-source peer-to-peer networks. For instance, say you wanted to take out a $10,000 loan in Ether. I could go to a website like Dharma and easily obtain that loan from another user or a pool of users at a fixed rate, after putting up the necessary collateral in a smart contract.
Though it sounds counterintuitive, it is even possible to take out a loan of Bitcoin using an Ethereum-based platform. Platforms like Compound offer loans in Wrapped Bitcoin (WBTC). WBTC is a token issued on Ethereum via the ERC-20 standard that is backed 1:1 with Bitcoin. In other words, it functions similar to a stablecoin, though, instead of US Dollars, it is pegged to Bitcoin. This allows users to gain exposure to Bitcoin but with the added functionality that the Ethereum DeFi ecosystem offers.
Here are some of the top Ethereum-based Lending Platforms:
DeFi Insurance
Insurance is another massive market that the Ethereum DeFi community is looking to upend. The smart contract functionality can offer a lot of benefits to a typical insurance agreement. Many times, the claims process is extremely arduous and payouts can take a very long – several years in some drastic cases. With smart contracts, if mutually agreed upon conditions are met, then payouts can take place immediately without a claim even needing to be filed. For instance, imagine you buy flight insurance through an Ethereum-based platform and your flight ends up getting canceled. The platform will instantly see that a flight did not leave as scheduled and automatically pay you out. No need to call an account manager or file a claim online and wait weeks for a response.The project Etherisc was testing out this exact concept recently.
By using a blockchain like Ethereum, insurers can add efficiency and transparency to the process. Payouts will be quicker and more painless. Insurers will be held more accountable, as conditions are baked into code rather than having to trust the fallible employees of a company. Additionally, this will save insurers significantly on administrative costs, which could serve to lower premiums overall for customers.
Even major global insurance companies are already looking to take advantage of the Ethereum blockchain for this. Recently, Metlife announced that they will be using Ethereum for a new life insurance program. By connecting its smart contract platform with a database of obituaries, it can automatically determine and payout beneficiaries at the moment its program becomes aware of a death. It records all transaction and information in the blockchain, where it is unalterable and viewable.
Additionally, the permissionless nature of insurance could potentially bring in a large market segment of new users. Many times, insurers require a great deal of personal information on customers prior to providing an insurance policy. For certain types of insurance, users may not have to provide any personal information and insurers will not be able to deny coverage. Of course, certain types of insurance, like health insurance, inherently require an abundance of information about a customer in order to price a policy. However, more mundane types of insurance, like property insurance, renter’s insurance, flood insurance and others, could be accessed without the current bureaucratic process.
For instance, Augur is an Ethereum-based predictions market that can be used as a form of insurance. On Augur, anyone can start a predictions market about anything and have millions of dollars trade based on the likelihood of an outcome. Let’s say an event planner is throwing a large outdoor event and wants to insure herself against the risk of it being rained out, in which case she would stand to lose a lot of money. She is unable to get an insurance policy, so she opens a predictions market on Augur that asks whether or not it will rain more than 2 inches in her city on the specific date of her event. Then, anyone could bet on whether that would actually happen or not. If someone takes the other side of that prediction and it does rain, then she will collect, earning her all the money she lost due to the rain. This functions similarly to a futures market, but works effectively as insurance, as well.
There are many other projects out there, both by new startups and long-time incumbents, looking to disrupt the multi-trillion dollar insurance industry. Here are some of the top Ethereum insurance projects:
DeFi Escrow
Using Ethereum’s smart contracts, a user can essentially take advantage of an escrow service without needing to hire a company or person. A smart contract, or an application providing an intuitive interface with a smart contract, can hold the money from one party and, when certain conditions are met, release the money to the other party.
An easy to understand example is a real estate transaction, which almost always use escrow services. For instance, imagine you were selling your $1M house. Traditionally, once you found a buyer, the buyer would wire money from their bank account to an escrow company’s account. The escrow company would then hold the money until certain conditions are met, like house inspections or repairs, and final paperwork is signed. After everything is signed (which could take several weeks), the buyer moves into the house and the escrow company wires money to you, after taking a small fee. Additionally, sometimes escrow companies will continue to hold money in their account for other taxes and fees owed to the bank at a later date.
With Ethereum, real estate transaction would not need to spend money on third-party agents, which would have been up to $20,000 in the example transaction. Instead, users could take advantage of what’s called a multi-sig wallet. A multi-sig wallet acts like an escrow account that holds money and would require permissions from several parties (aka multiple signatures) before releasing any funds. Anyone can build their own multi-sig wallet. But if you don’t have the tech savvy, here are some projects looking to solve for these very issues using Ethereum:
Overall, the Ethereum DeFi landscape is young but already starting to offer experimental new ways to obtain a plethora of financial services. Currency is only one aspect of how blockchain is revolutionizing finance. Blockchain has the potential to disrupt more than just our bank accounts and could make its way into other products we all use regularly, like lending, insurance, escrow and many others. For now, Ethereum is the leading ecosystem to access all of it.