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Decentralized Finance Needs Feasible Solutions, Not Trendy Ones – ReadWrite



Decentralized Finance Needs Feasible Solutions, Not Trendy Ones - ReadWrite

In 2008, Bitcoin’s release initiated a financial movement, whose present form is Decentralized Finance or DeFi. Over the years, DeFi has steadily made its mark globally, with the promise of upending traditional financial systems.

The response, of course, has been genuinely overwhelming. DeFi’s positive impact in mitigating conventional economic pain points has also been significant. Yet, scrutiny of the bigger picture reveals something grave, a problem that we must overcome to transform finance.

Speculations, trends, and hype have been significant growth drivers since the early days of the blockchain-cryptocurrency domain. The so-called “ICO Craze” of 2017 was among the worst-possible manifestations of this scenario, resulting in losses worth millions. Presently, as we stand at the frontiers of a new financial paradigm, we must learn from past mistakes.

Decentralized Finance Needs Feasible Solutions

The DeFi boom is nothing like ICOs; mere white papers drove the latter, while to a great extent, delivered results are fuelling the former. Despite that, new trends emerge at regular intervals, and innovators jump on the bandwagon without much vision.

In all of this, the tendency has been to completely disregard and oppose the founding principles of Centralized Finance (CeFi). This approach is dogmatic and short-sighted, with the potential to hamper our long-term interests as stakeholders of new finance.

CeFi has problems, no doubt, but there’s also quite a lot that we can learn from legacy financial systems.

This article lets us discuss how we can transform finance through pragmatic and comprehensive solutions rather than trendy ones. How, in the longer run, can we innovate systems that cohere with the broader needs of consumers and enterprises? That is, precisely, the question we must try to answer.

Centralized Finance: The Good and The Bad

A cool-headed approach cannot possibly deny the impact of CeFi in our day-to-day transactions. For one, the domain has evolved through decades of experience; there’s a deep knowledge pool that we must not ignore.

Most financial services that we experience today — deposits, lending, borrowing, and so on — have emanated out of developments in CeFi.

Elaborate credit rating systems, for instance, have been of great use across sectors, facilitating cross-border lending, microfinance, and so on. Innovations in Fintech, as well, began within CeFi.

Everything seems excellent with CeFi. Where did it go wrong?

Why, if at all, do we need new financial systems? Because of three significant aspects, centralization can be very harmful: governance, record maintenance, and risk management.

To exemplify the point, consider the regular lending procedure, where a central authority is in complete control. From background check to interest rate determination, this entity governs every aspect of the process.

A few decide for the many, which may not always be advisable or even acceptable. Consumers, on their part, have little or no say in the process that involves their funds and futures.

The distribution of risk is highly concentrated.

The banks involved are usually the sole bearer of the defaulting risks. Banks charge hefty interests to compensate for high risks, which is ultimately detrimental to financial inclusion. As a whole, the distribution of value and risk in CeFi is highly inequitable, affecting every stakeholder somehow.

Centralized record-keeping and data storage is another aspect of concern with CeFi, as it dramatically hampers security.

Centrally located servers represent single-points-of-failure, becoming easy targets for hackers. Apart from that, censorship, espionage, manipulation, and fraud are some of the other persistent problems of CeFi.

Additionally, monolithic systems imply high costs for implementation, maintenance, and upkeep; this inflates the cost of the end-product or service.

Decentralized Finance: The Alternative to CeFi?

DeFi has the potential to resolve financial pain points, no doubt. It is still too early, though, to make sweeping claims about how it will completely replace CeFi. Although DeFi is treading with long strides, there’s still much ground to cover before it reaches where CeFi is today. This is true in terms of usability and applicability, at least. Nevertheless, DeFi has been transformative in more ways than one.

Consider — a distributed community governs the lending procedures.

As opposed to CeFi, considering the previous example, a distributed community governs the lending procedure, involving an automated consensus protocol.

The determination of interest rates is also algorithmic, ensuring a fair rate structure for everyone.

Above all, there’s a horizontal distribution of risk across lenders, and no single entity carries the entire burden of default. Furthermore, distributed record-keeping and data storage mitigates the risks of hacks; the absence of centralized governance prevents censorship, monitoring, and manipulation.

The immutability of distributed ledgers, such as blockchain, ensures optimal transparency and data security.

However, DeFi is not without shortcomings, especially concerning legal risks and low accountability. Open financial systems uphold the individual’s right to autonomy, but this results in adverse outcomes under specific scenarios.

What about the loosening of the regulatory controls — for profit?

For instance, enterprises can misuse the loosening of regulatory control to maximize profit and bypass obligations towards consumers. Wash trading, price manipulation by sharks, and scam are among the most prominent negativities arising from open finance.

Often, platforms that do not comply with KYC/AML requirements serve as breeding grounds for black markets and money laundering.

Low scalability and interoperability obstruct the realization of DeFi’s fullest potential.

Unlike conventional financial services, DeFi, by and large, is still unable to facilitate day-to-day economic interactions. Solutions in this domain must be able to interoperate, not just amongst themselves but also with the existing financial infrastructure. Only when DeFi and CeFi work in tandem shall we have the comprehensive financial that befits the future.

Semi-Decentralized Finance: Combining the Best of Both Worlds

DeFi and CeFi, as we have seen, both have their upsides and downsides. Presently, we are unable to have fully decentralized financial systems without compromising their functionality or robustness.

The need of the hour, then, is to find ways to leverage the strengths of both CeFi and DeFi. Semi-Decentralization—the middle-way, of sorts—is the most feasible and pragmatic approach to finance, at least for now.

Connecting compiled credit reports.

In lending, decentralized platforms can collaborate with centralized credit unions, aggregating credit scores for prospective borrowers. By connecting compiled credit reports with users’ on-chain wallets, it’s possible to liberate them from overcollateralized loans. The determination and standardization of interest rates shall remain decentralized, thereby ensuring optimal fairness.

Semi-Decentralization fares better with risk management as well.

Borrowers can still get loans from liquidity pools rather than from individual lenders. But legal integration with conventional finance provides a way to recover funds in the case of default. The process is swift and cost-optimized, as the arbitration occurs in bulks. In most cases, we can recover in this manner; if not, then liquidity providers bear the loss in proportion to their staked liquidity.

Globally, the financial community has started the future.

Innovators within the global financial community have already embarked on this journey towards the future. A significant number of upcoming projects are adopting the semi-decentralization approach.

Ripple and XinFin, for instance, are famous names in this regard, innovating with centralized and decentralized technologies in unison. Centaur is another hybrid solution, leveraging CeFi’s efficiency with DeFi’s distributed management.

In projects like Centaur, the flexibility and robustness of conventional finance augment the potential for immutable and transparent data storage and enhanced security.

The direct outcome of this combination is an unprecedented broadening of the scope for use-cases in new finance. By integrating financial licenses with blockchain’s backward-compatible interoperability, semi-decentralized innovations lay the foundations for the seamless financial experience.

Image Credit: burst; pexels; thank you!

Kor Kiang Sean

Co-Founder at Centaur

Kor Kiang Sean, Co-Founder of Centaur, has five years of technical experience in the blockchain industry ranging from mining rig configuration to smart contract and blockchain development. He first started with hexa-GPU mining rigs for Litecoin and gradually delved into the software side of distributed ledger technologies, working on smart contract development, consensus algorithm design and business use cases for DLTs. Sean has since worked on multiple blockchain projects and provided support with the digital transformation of traditional firms.


Fintech Kennek raises $12.5M seed round to digitize lending



Google eyed for $2 billion Anthropic deal after major Amazon play

London-based fintech startup Kennek has raised $12.5 million in seed funding to expand its lending operating system.

According to an Oct. 10 report, the round was led by HV Capital and included participation from Dutch Founders Fund, AlbionVC, FFVC, Plug & Play Ventures, and Syndicate One. Kennek offers software-as-a-service tools to help non-bank lenders streamline their operations using open banking, open finance, and payments.

The platform aims to automate time-consuming manual tasks and consolidate fragmented data to simplify lending. Xavier De Pauw, founder of Kennek said:

“Until kennek, lenders had to devote countless hours to menial operational tasks and deal with jumbled and hard-coded data – which makes every other part of lending a headache. As former lenders ourselves, we lived and breathed these frustrations, and built kennek to make them a thing of the past.”

The company said the latest funding round was oversubscribed and closed quickly despite the challenging fundraising environment. The new capital will be used to expand Kennek’s engineering team and strengthen its market position in the UK while exploring expansion into other European markets. Barbod Namini, Partner at lead investor HV Capital, commented on the investment:

“Kennek has developed an ambitious and genuinely unique proposition which we think can be the foundation of the entire alternative lending space. […] It is a complicated market and a solution that brings together all information and stakeholders onto a single platform is highly compelling for both lenders & the ecosystem as a whole.”

The fintech lending space has grown rapidly in recent years, but many lenders still rely on legacy systems and manual processes that limit efficiency and scalability. Kennek aims to leverage open banking and data integration to provide lenders with a more streamlined, automated lending experience.

The seed funding will allow the London-based startup to continue developing its platform and expanding its team to meet demand from non-bank lenders looking to digitize operations. Kennek’s focus on the UK and Europe also comes amid rising adoption of open banking and open finance in the regions.

Featured Image Credit: Photo from; Thank you!

Radek Zielinski

Radek Zielinski is an experienced technology and financial journalist with a passion for cybersecurity and futurology.

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Fortune 500’s race for generative AI breakthroughs



Deanna Ritchie

As excitement around generative AI grows, Fortune 500 companies, including Goldman Sachs, are carefully examining the possible applications of this technology. A recent survey of U.S. executives indicated that 60% believe generative AI will substantially impact their businesses in the long term. However, they anticipate a one to two-year timeframe before implementing their initial solutions. This optimism stems from the potential of generative AI to revolutionize various aspects of businesses, from enhancing customer experiences to optimizing internal processes. In the short term, companies will likely focus on pilot projects and experimentation, gradually integrating generative AI into their operations as they witness its positive influence on efficiency and profitability.

Goldman Sachs’ Cautious Approach to Implementing Generative AI

In a recent interview, Goldman Sachs CIO Marco Argenti revealed that the firm has not yet implemented any generative AI use cases. Instead, the company focuses on experimentation and setting high standards before adopting the technology. Argenti recognized the desire for outcomes in areas like developer and operational efficiency but emphasized ensuring precision before putting experimental AI use cases into production.

According to Argenti, striking the right balance between driving innovation and maintaining accuracy is crucial for successfully integrating generative AI within the firm. Goldman Sachs intends to continue exploring this emerging technology’s potential benefits and applications while diligently assessing risks to ensure it meets the company’s stringent quality standards.

One possible application for Goldman Sachs is in software development, where the company has observed a 20-40% productivity increase during its trials. The goal is for 1,000 developers to utilize generative AI tools by year’s end. However, Argenti emphasized that a well-defined expectation of return on investment is necessary before fully integrating generative AI into production.

To achieve this, the company plans to implement a systematic and strategic approach to adopting generative AI, ensuring that it complements and enhances the skills of its developers. Additionally, Goldman Sachs intends to evaluate the long-term impact of generative AI on their software development processes and the overall quality of the applications being developed.

Goldman Sachs’ approach to AI implementation goes beyond merely executing models. The firm has created a platform encompassing technical, legal, and compliance assessments to filter out improper content and keep track of all interactions. This comprehensive system ensures seamless integration of artificial intelligence in operations while adhering to regulatory standards and maintaining client confidentiality. Moreover, the platform continuously improves and adapts its algorithms, allowing Goldman Sachs to stay at the forefront of technology and offer its clients the most efficient and secure services.

Featured Image Credit: Photo by Google DeepMind; Pexels; Thank you!

Deanna Ritchie

Managing Editor at ReadWrite

Deanna is the Managing Editor at ReadWrite. Previously she worked as the Editor in Chief for Startup Grind and has over 20+ years of experience in content management and content development.

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UK seizes web3 opportunity simplifying crypto regulations



Deanna Ritchie

As Web3 companies increasingly consider leaving the United States due to regulatory ambiguity, the United Kingdom must simplify its cryptocurrency regulations to attract these businesses. The conservative think tank Policy Exchange recently released a report detailing ten suggestions for improving Web3 regulation in the country. Among the recommendations are reducing liability for token holders in decentralized autonomous organizations (DAOs) and encouraging the Financial Conduct Authority (FCA) to adopt alternative Know Your Customer (KYC) methodologies, such as digital identities and blockchain analytics tools. These suggestions aim to position the UK as a hub for Web3 innovation and attract blockchain-based businesses looking for a more conducive regulatory environment.

Streamlining Cryptocurrency Regulations for Innovation

To make it easier for emerging Web3 companies to navigate existing legal frameworks and contribute to the UK’s digital economy growth, the government must streamline cryptocurrency regulations and adopt forward-looking approaches. By making the regulatory landscape clear and straightforward, the UK can create an environment that fosters innovation, growth, and competitiveness in the global fintech industry.

The Policy Exchange report also recommends not weakening self-hosted wallets or treating proof-of-stake (PoS) services as financial services. This approach aims to protect the fundamental principles of decentralization and user autonomy while strongly emphasizing security and regulatory compliance. By doing so, the UK can nurture an environment that encourages innovation and the continued growth of blockchain technology.

Despite recent strict measures by UK authorities, such as His Majesty’s Treasury and the FCA, toward the digital assets sector, the proposed changes in the Policy Exchange report strive to make the UK a more attractive location for Web3 enterprises. By adopting these suggestions, the UK can demonstrate its commitment to fostering innovation in the rapidly evolving blockchain and cryptocurrency industries while ensuring a robust and transparent regulatory environment.

The ongoing uncertainty surrounding cryptocurrency regulations in various countries has prompted Web3 companies to explore alternative jurisdictions with more precise legal frameworks. As the United States grapples with regulatory ambiguity, the United Kingdom can position itself as a hub for Web3 innovation by simplifying and streamlining its cryptocurrency regulations.

Featured Image Credit: Photo by Jonathan Borba; Pexels; Thank you!

Deanna Ritchie

Managing Editor at ReadWrite

Deanna is the Managing Editor at ReadWrite. Previously she worked as the Editor in Chief for Startup Grind and has over 20+ years of experience in content management and content development.

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