Jibrel COO talks about The future of Blockchain and Defi

Talal Tabaa, Founder and COO of Jibrel network recently wrote a piece for Magnitt and discussed the future of blockchain and DeFi. As he states, " we must first understand its history. Among many concepts described in the Bitcoin whitepaper, one of the most important was a new way of recording, verifying, storing, and managing data that allowed for digital scarcity."

Before Bitcoin, it was impossible to apply the concept of scarcity, a key characteristic of gold, in the digital world. If you imagine sending a PDF file via email, what happens is that you make a copy of the file and send it. Now two files exist on two devices. This isn't an issue when sending PDF files, but it is when you are trying to send a digital asset of value. This is why all previous attempts at creating digital money have failed. Digital scarcity is important as the immutability of transfers means the functions of reconciliation, settlement, clearing, and asset registries are automated.

A simple example is how a bank operates as an intermediary when you send US dollars to someone else. It first verifies the sender's and receiver's identities and bank accounts, then confirms that the sender has sufficient funds and, once the transfer is complete, makes sure that the sender no longer has access to the funds sent. With a blockchain-based asset, these functions are built-in so the intermediary’s role will either change or will no longer be required.

The removal of intermediaries in the payment process was Bitcoin's most significant innovation; it reduced friction, leading to lower transaction fees. This is an essential feature of DeFi, allowing for more efficient financial services at transparent and improved rates.

One catalyst of the rise of DeFi in the coming years is the misalignment of incentives between financial institutions and end-users.

The financial crash of 2008 provides an excellent example of what can go wrong. Banks, rating agencies, brokers, and others weren't incentivized to price risk correctly. Prior to the subprime mortgage market blowing up, banks created instruments which they sold to their clients, and then in some cases took opposite positions, which allowed them to profit if the underlying mortgage failed (which was very common in the crash).

A decade later, a warped incentive structure remains in many areas of finance. When it comes to lending, many banks will lend to large corporations rather than SMEs with a similar risk profile, simply because they get paid more for the larger transactions.

There's also the matter of risk assessments not being robust. A bank's view of risk and creditworthiness can be influenced by personal relationships and susceptible to manipulation, rather than based purely on merit and collateral. These issues have come to light recently in examples such as the unpaid loans of over 2.1 Billion USD from UAE banks to NMC Health. 

According to a recent McKinsey report, "over 2.5 billion of the world's adults don't use banks or microfinance institutions to save or borrow money". The MENA region has one of the world's highest proportions of unbanked or underbanked populations. Innovation should be about providing more people with basic financial services, not just allowing a limited group to benefit.

DeFi is disrupting finance, shifting blockchain's impact from payments to lending, borrowing, trading, and much more. It is a new monetary protocol that consists of financial applications, allowing anyone to access financial services in a peer-to-peer manner.

DeFi is exciting because it will allow us to innovate in financial services freely. To get a glimpse of what exists today, it's worth looking at how you can get a loan using one of the most innovative DeFi projects, MakerDAO. The MakerDAO smart contract does not care about your financial or social background. All it cares about is that you maintain a collateralization ratio of 150%. This means your loan amount needs to be at least two-thirds of the asset you pledge as collateral. Assuming you want a loan of 100 USD, you would need to pledge $150 worth of Ethereum into the protocol.