Advancement in technology is affecting every sector of the global economy including the financial industry of decentralized finance (DeFi). DeFi is seen as a channel to re-invent the entire financial industry by offering financial services using software built on top of public blockchains.
Any financial service is built around trust, competence, and data. Nowadays, these three fundamental pillars are reinvented into software products. Based on that perspective, the DeFi services will be developed by reinventing layers of competence, trust, and data.
The blockchain technology is expected to enhance the financial sector throughout the world.
The trust layer will reinvent as public blockchains featuring protocols that run on them. Instead of trusting the traditional financial institutions, now users can trust decentralized networks of nodes that maintain both coded rules and ledgers of transactions. On the other hand, the competence layer will be reinvented as openly available decentralized networks of financial intelligence created and fully maintained by machines.
However, the data layer will reinvent as decentralized oracles that collect and authenticates data from external origins. The authenticated data is then transmitted into decentralized artificial intelligence (AI) and public blockchain networks. In the future, it is expected that most financial services in DeFi sector will be developed, maintained, and offered as software products that interoperate among AI networks, decentralized oracles, and public blockchains.
Public Blockchains; the 1st innovation wave
The emergence of the public blockchains as decentralized payment networks was ranked as the first innovation wave experienced in the field of decentralized finance. In that wave, fiat currency was changed into crypto coins empowered by blockchain technology. The primary use-cases for cryptocurrencies are payments and storage of value.
The first wave dominated mostly from 2009 up to 2013. The most popular and famous examples are bitcoin released in 2009 and litecoin released in 2011.
Protocols are the 2nd Innovation Wave
During the second wave of innovation, reinvention of trust in the decentralization protocols concept continued. Protocols are rules-based systems that run on public blockchains. This second wave came up with decentralized programmable money that combined public blockchain with smart contracts which are coded rule-based systems.
The wave brought platforms to create protocols like Stellar in 2014, Ethereum in 2015, and EOS in 2018. Also, protocols that connect different blockchains like Polkadot and Cosmos came up. The second wave is also credited for bringing use-case protocols for stable cons like trueUSD and decentralized exchanges like Bancor and Ox. Also, lending platforms like Compound, Dharma, and MakerDao were invented.
The analysis shows that derivatives like dYdX and Index Protocol were invented in the same era. The second wave dominated the larger part of2014 through to 2018.
The 3rd Innovation Wave; AI and Decentralized Oracles
The next wave is expected to be about the reinvention of decentralized data and competences. These are the missing elements essential for building fully functional automated, interoperable, decentralized products like fund management, lending, and derivatives. For instance, lending is not only transition between lender and borrower, but it also needs data on borrowers and competence to score borrower.
Thus, the 3rd innovation wave may bring decentralized oracles and networks of machine intelligence that create financial competences for other ecosystem players. An excellent example of decentralized oracles is chainlink released in 2019.