The financial sector that we know must innovate technologically in the next 4 years if it does not want to be immersed in absolute darkness.
There is no shortage of reasons for this argument, given that technology will help the way financial institutions operate by relying on artificial intelligence, machine learning and blockchain to increase operational efficiency, reduce costs and improve the customer experience. Unsurprisingly, the financial sector is a sector with a large and intense competition. Without going into too much detail, fintechs are entering the market with innovative products and more efficient and personalised services. On the customer side, their evolution, tastes and ways of interacting with their money have logically also evolved. They want digital experiences to be accessible anywhere, anytime. To be integrated into their daily lives and more personalised. Financial institutions that do not provide banking and financial services along these lines will find it very difficult to build customer loyalty, retain and grow their customer base. But customers are not only looking for service, improvements and financial empowerment, they are concerned about the obscurity and lack of transparency of these entities with their money. They are concerned about the guarantees of their deposits and that their data are safe and secure.
Luckily, today we don’t have to wait for the financial sector to innovate or improve with the application of technology. We have at our disposal a real and tangible alternative such as DEFI (decentralised finance) within the blockchain sector. I am not going to list the competitive advantages or the products that this disruptive technology makes available to us, but I do want to emphasise the continuous evolution it undergoes. How it is capable of improving and adapting to the needs that this demanding industry is constantly facing. Of all the new developments that I have been researching this year, two are undoubtedly capturing my time and interest, which I am sure will make a mark inside and outside the industry, being these developments great catalysts of liquidity.
1) Up until now, when a DAO with treasury (i.e. tokens) wants cash to maintain and pay for its operations, its main option is currently to sell part of its tokens in any form (private sales, market, etc.). As a result of internal discussions to improve this process, maintain possession of their tokens and opt for a more conservative stance, DAOs may soon have an alternative to get their cash in the form of corporate bonds, allowing this organisation to borrow stable currencies at fixed rates, using their project tokens as collateral and without liquidation risk. It is a perfect strategy and manoeuvre, mixing a risk-taking profile with a more conservative one, thus satisfying both parties. The risk-taking investor will buy these DEFI bonds at a discount and then will be allowed to repay the loan on the maturity date with interest set by the market. On the other hand, DAOs are allowed to choose how they want to structure the offering, as corporate debt is a large and attractive market, given that companies of all kinds have cash needs, selling as they have done so far is fine, but debt-based financing makes much more sense for them.
2) Account managers who use DEFI are constrained in a system with isolated liquidity, a situation that penalises our objectives, worsens the permeability of returns and puts us under continuous stress looking for the best market conditions based on liquidity. This is where omnichain protocols come into play, which allow us to borrow on any blockchain compatible with LayerZero, unifying liquidity, income, costs and the use of the protocol that implements it, as users will use it regardless of the blockchain where it is located. When it comes to regulation and thinking about a future scenario, these types of protocols undoubtedly improve the tax experience, as we are taxed when assets are sold, but not when they are used as collateral. For example, depositing ETH in a loan protocol and then borrowing Avalanche against the ETH collateral. In other words, this innovation and evolution in the service offered by this type of protocol allows us to use the profits of one network as collateral in another, and thus maintain a virtuous circle of profitability, which will only be interrupted at the moment of exiting the positions taken from a single point.
There are risks associated with this practice, losing funds is a real and very likely thing to happen if you do not have healthy habits in operational security within the DEFI, even more so when we are crossing blockchains continuously in newly implemented protocols.