Defi : What Is It, And What Does Blockchain Do?

What is Defi (vs Centralized Finance)?

Defi is short for Decentralized Finance. What does this mean? Let's start by looking at the definition of  the two composite words. First word is finance - which is the management of money. Currently done through an intermediary. You can borrow money from a bank to pay for a car,  you have a mortgage on your house from a local bank,  from save your paycheck in a bank, loan your savings to another person via a bank to earn interest, you can  invest you savings in the stock market through your brokerage, pay your tennis fees to your friend  using Paypal, buy a Sony PS5 by paying with your credit card. The second word is decentralize - which is a control concept, where decisions are made by peers via voting, instead of a central authority. Defi's enemy is centralized finance, which is today's traditional method of finance (which is through intermediaries). Centralized because all financial activity needs these two intermediaries 1) government for fiat currency & identification 2) financial intermediaries / institutions such as banks to store your money safely and stock brokerage to store your certificates safely. This is bad because it is 1) slow (think T+2)  2) expensive (think 2.5% credit card fee) 3) limits new financial services.

How Can Blockchain Help Defi?

The basic concept behind defi is having a way (say platform) to provide traditional centralized finance - but without a government and financial intermediaries. An implicit assumption that the government and financial intermediaries provide is trust.  Trust that data entered is good. Won't be altered. Always accessible. Will be honored. So basically defi needs to get rid of the government and financial intermediaries - but still retain trust. Blockchain can provide this : a single source of data, public, and trusted. That is why most defi platforms are built on Ethereum - which is blockchain. What makes Ethereum good to replace centralized finance? Recall that the enemy of defi is centralized finance, which requires 1) government fiat currency and identification 2) financial intermediaries / institution. So how will we replace fiat currency, identification, and a financial intermediary / institution?   Ethereum can, which has 1) ledger 2) smart contract 3) native currency / token called ETH 4) ERC-20 standard for people to create their own token (fungible ) on Etheruem . For identity, an Ethereum public address will serve as your psuedo-annonymous identity (psudeo-anonymous because all public addresses and transactions to/from that address is visible to the public, but the public won't know WHO is behind that public address). The Ethereum ledger will serve as the trusted bank ledger. ETH will serve as the currency, but now digital/crypto instead of fiat. And ETH is NOT backed a government.

Hype vs Reality of Defi : FOMO?

What are some of the motivations to participate in defi? 1) defi provides to you (as a consumer) a service that you can't get from today's centralized financial services 2) defi gives you (as an entrepreneur)  a way to provide a service that tradtional centralized financial services can't provide  3) you (as a person on the sidelines) want to dabble in this hype due to FOMO 4) you (as an enterprise) want to create a buzz and want to dabble and hedge in defi - just in case it takes off.  CNBC lists Mark Cuban dabbling in defi, so does that make it legit?

 

Australian Stock Exchange (ASX) CHESS+ stock trading system modernization using blockchain/DLT

 

The Australian Stock Exchange (ASX), based in Sydney, is one of the top 20 largest stock exchange in the world. For reference, the NYSE and NASDAQ stock exchanges are the top two.

Stock exchanges basically allow stock brokers/dealers to execute, settle, and clear stock trades. Clearing and settlement is also called post-trade.

ASX will act as a CENTRAL COUNTER PARTY to be a trusted middleman between the stock seller and the stock buyer.

Stock trade EXECUTION, that is to buy or sell, happens in real time. So that the market price of the stock is captured. Let's do the deal now and figure out details later.

But stock CLEARING and SETTLEMENT happens later - in non real time. Also known as batch processing. T+2 phenomenon.

Stock trade clearing is the step to ensure match buy order from the investor and sell order from the issuer, and that the seller does own the stock, and that the buy does have the funds to buy the stock.

Stock trade settlement is the step to transfer the stock from the seller to the buyer and to transfer funds from the buyer to the seller.

 The actual stock certificate is held in a CUSTODIAN (bank). It does not need to be handed physically from the seller to the buyer.

ASX's system to clear and settle stocks trades is called Clearing House Electronic Subregister System (CHESS).

It was put into operation in the 1990. Its main goal was to DEMATERIALIZE/DIGITIZE stock trades.

Stock trades have typically been physical paper based. 

Dematerialize turns physical paper documents into digital form.

CHESS has worked well, but in need of modernization. Speeding up post trade (clearing and settlement) from T+5 down to T+2.

But CHESS is now 25 years old. Time to update or replace it. The system to replace CHESS will be called CHESS+. 

CHESS+ will use blockchain/DLT from VMware, and the Daml smart contract programming language from Digital Asset.

VMware Blockchain will provide the blockchain DLT platform that will serve as 1) storage - single source of truth 2) compute - to execute smart contract programs. The smart contract programming lanauge

What is driving the modernization? Pain point (T+2, unify systems into single record). Vision driven (jump on DLT). Want to differentiate (be the 1st to DLT).

A stock exchange will have multiple participants, on both sides of a trade. The seller can be an ISSUER of a stock (as part of an IPO). The buyer can be an INVESTOR.

So for CHESS+ to be successful, its participants (investors, issuers, etc) must be able to connect and interact successfully with it.

As of December 2021, CHESS+ is anticipated to go live April 2023. Before going live, it has to be tested. Testing will be performed in two phases. In the first phase (happening now), called ITE1,  the ISV software providers be testing CHESS+. In the second phase, called ITE2, user participants will join in its testing.