The article is penned by Alice Henshaw. She is a smart contract engineer at Fluidity. Fluidity are a New York-based company working on DeFi, and are best known for creating decentralized exchange Airswap. Previously Alice worked at ConsenSys where she designed and implemented smart contract systems responsible for over $100M USD in transaction volume. She is a graduate of Oxford University with a degree in Computer Science.
Decentralized Finance (or DeFi) represents one of the most promising near-term use cases for public blockchain technology. By replacing traditional financial intermediaries with immutable open-source software, DeFi has the potential to reduce costs and expand access to traditional financial products. And because many of the underlying protocols are open-source and interoperable, participants can freely mix and match various financial primitives like lego blocks to create entirely new products and forms of financial engagement between users.
While DeFi can theoretically encompass a wide array of decentralized financial products, the application that has gained the most traction to date is lending. Ethereum-based DeFi protocols like MakerDAO and Dharma, for example, have originated roughly $40 million in loans in the last 30 days (and have $100 million in total outstanding loans), up from virtually zero a few months prior. Though these figures are impressive (particularly given the nascent state of the industry), they of course pale in comparison to virtually any particular sub-segment of legacy credit markets. The American mortgage market alone, for example, currently stands at $15 trillion in outstanding debt.
In order for DeFi credit markets to continue to scale and develop into a legitimate alternative to bank financing, they must build out the capacity to accept real world assets (like real estate) as on-chain collateral for loans. Doing so will allow current collateralization ratios and interest rates to go down and also expand access to credit by widening the pool of assets that can be borrowed against.