The Third Innovation Wave of Decentralised Finance (DeFi)
In this article I will describe my perspective on technological development within the financial sector of decentralised finance (DeFi). DeFi reinvents financial industry by providing financial services using software that is built on top of public blockchains.
Perspective of reinvented trust, competence, and data
My technological perspective on DeFi is based on concept, that any financial services is built around three pillars — trust, competence, and data — and nowadays they are reinvented into software products. Based on this perspective, DeFi services will be created by reinventing layers of trust, competence, and data.
Figure 1. Transformation of finance
Trust layer is reinvented as public blockchains and protocols running on them. Instead of trusting financial institutions, now we can trust to decentralised network of nodes who maintains both coded rules and ledgers of transactions. It seems that competence layer will be reinvented as openly available decentralised networks of financial intelligence created and maintained by machines.
But the data layer is reinvented as decentralised oracles that collects and verifies data from external sources to feed them into public blockchains and decentralised artificial intelligence (AI) networks. I believe that in future, almost any financial services in DeFi sector will be created, maintained, and provided as software products which interoperate among public blockchains, decentralised oracles, and AI networks.
Within this perspective I will look on technological development of DeFi technologies.
The 1st innovation wave is public blockchains
The rise of the public blockchains as decentralised payment networks is the first innovation wave of decentralised finance. During this wave fiat currency was reinvented into crypto coins, that are empowered by blockchain technology. The basic use-cases are payments and storage of value. This wave dominated mostly from 2009 till 2013. The most prominent examples are bitcoin (released in 2009) and litecoin (released in 2011).
Figure 2. Innovation waves of decentralised finance
The 2nd innovation wave is protocols
The 2nd innovation wave continued to reinvent trust in the concept of decentralised protocols. It is rules based systems that is run on public blockchains. This wave brought us decentralised programmable money mostly as combination of public blockchain with smart contracts (coded rule based systems). It brought as 1) platforms to create protocols, e.g. Ethereum (released in 2015), Stellar (2014), and EOS (2018); 2) protocols that connects different blockchains (e.g. Cosmos and Polkadot.), 3) use-case protocols for stable coins (e.g. trueUSD), lending (MakerDAO, Compound, Dharma), derivatives (dYdX, Index Protocol), decentralised exchanges (0x, Bancor). This wave dominated mostly from 2014 till 2018.
The 3rd innovation wave is decentralised oracles and AI
I believe that the next wave will be about reinventing decentralised data and competences. Those are missing elements for building fully automated, interoperable, decentralised products like lending, fund management, derivatives. For example, lending are not only transition between lender and borrower, but it requires as well data on borrowers and competence to score borrower. Thus I would expect that 3rd innovation wave will bring decentralised oracles and networks of machine intelligence that create financial competences for other ecosystem players. We already see good examples of decentralised oracles e.g. chainlink (released in. 2019).
About the Author
Sandris Murins is the co-founder of Murin’s startups’ studio. We are helping to build crypto startups from scratch for investors and for founders. My mission is to put teams and investors into the best positions to capitalise on emerging opportunities at the intersection between crypto, decentralised finance and artificial intelligence.