PERSPECTIVES ON

DECENTRALISED FINANCE
It is virtually impossible have a meaningful and informed discussion on the future
of trade without reference to the pervasive force of cryptographic and distributed
ledger technology.

Proponents of this innovative and rapidly evolving technology contend that it

benefits businesses, people, and the economy but there are others who remain
unconvinced – especially given the renowned market volatility.

Our 2021 report outlined that global trade defied expectations; showing surprising
resilience in 2020 despite the economic challenges posed by the pandemic. The
research also uncovered that the most transformative element of the global trade
outlook is technology.

Blockchain, decentralised finance (DeFi) and other new and disruptive

technologies were found to accelerate trade growth, with DeFi protocols
witnessing considerable investment.

Bank of America officially acknowledged in October 2021 that cryptocurrencies

— now worth USD 2tn — had become too big to ignore; a view that is hard to
disagree with.

Thus, investigating, understanding and predicting the impact on global trade of

DeFi and all associated cryptographic technologies is front of mind for academic
and captains of industry. It is also the focus of DMCC’s latest ‘Special Edition’ of
the Future of Trade report.

The information shared in this special edition report represents the views of an
international panel of technology experts combined with conclusions drawn from
extensive academic research, and the DMCC Crypto Centre in Dubai.

Whilst the research is deliberately designed to offer an objective perspective, it

is clear that the subject of DeFi and its transformative impact on traditional trade
finance models is something that merits our attention.

Regulation, education, infrastructure, sustainability and are all discussed in this

balanced assessment, and it is our hope that report is both informative and offer
a glimpse into the Future of Trade.
Introduction Introduction

INTRODUCTION

Perhaps one of the most prevailing misconceptions amongst In the years since its inception, blockchain has become
the general public is that blockchain = Bitcoin. While Bitcoin a base layer for technological innovations that carry the
certainly has cemented its place as the world’s most famous potential to touch a myriad of industries and update
cryptocurrency, at least for the time being, remains perhaps business processes from supply chain management to
the most publicly recognisable use of distributed ledger secure data exchange systems. Indeed, both banks and
technology, blockchain is far more than its most prominent corporations have started to explore blockchain’s potential
digital currency. value add for their businesses (some publicly, some in the
privacy of their own research divisions).
At its core, a public blockchain is a digital ledger which records
transactions and shares this immutable record across all As the blockchain industry continues to grow, certain areas
participants within the network. The underlying cryptographic and topics have emerged that garner particular interest.
concepts of blockchain technology were first explored as While non-fungible tokens (NFTs) have caused quite the
early as the 1980s and came to full fruition in 2008 with the stir in the recent period with record-setting sales for digital
now famous Bitcoin Whitepaper and the subsequent arrival art pieces, decentralised finance (DeFi) has captured the
of Ethereum in 2013. While Bitcoin signaled the radical arrival attention of the financial world.
of new currencies in the form of digital money that operates
outside the control of any central government, Ethereum
sought to utilise blockchain technology for not just the
maintenance of a decentralised payment network, but also laid
the foundation for second-layer applications and contracts,
thus dramatically broadening its applicability.

4 5
Table of contents Table of contents

TABLE OF
CONTENTS
EXECUTIVE SUMMARY 8 A Tool for All 30

SCOPE & PURPOSE OF THIS REPORT 9

The Infrastructure Question 32

What is DeFi 10

Incompatibility as Opportunity 13 DeFi and Global Trade 36

Blockchain Powered Trade Finance 37

Substitute Vs. Supplement 15

DeFi and the Dawn of Personal Financial Services 18 Regulating a New Frontier 39

Is DeFi an alternative to traditional finance

or will it ultimately be integrated into classic
financial institutions? 20 Conclusion 46

Decentralised KYC Solutions Will Reconfigure

The Finance Sector and Prove That DeFi Is
Here To Stay 24

A Look into the Future

- Insights from Three Defi Startups Building on Tezos 26

6 7
Executive summary Scope & Purpose of this Report

EXECUTIVE SCOPE & PURPOSE

SUMMARY OF THIS REPORT
This publication serves as the first in-depth DMCC thought leadership In light of DeFi’s dramatic rise over the past 18 months, this report takes
report on both the global and local blockchain ecosystem, with a a closer look at some of the key discussions and challenges around DeFi,
particular focus on the decentralised finance (DeFi) space. The report posing three key questions:
gathers contributions from a number of key opinion leaders and voices
from within the growing DeFi space in order to share their views on 1. Substitute vs. Supplement: Is DeFi a viable alternative to traditional
where decentralised finance is headed in the near and far future. It financial infrastructures or will it ultimately be integrated into and
places a particular emphasis on three key questions: coexist alongside classic financial institutions?

1. Is DeFi an alternative to traditional financial infrastructures or will 2. A Tool for All: What are the opportunities and risks of this technology
it ultimately be integrated into and coexist alongside classic financial for both the developing and developed world?
institutions?
3. Regulating a New Frontier: How can regulators develop and introduce
2. What are the opportunities and risks of this technology for both the appropriate measures for emerging DeFi solutions without stymying
developing and developed world? innovation?

3. How can regulators develop and introduce appropriate measures for In order to explore these key questions, this report’s analysis also
emerging DeFi solutions without stymying innovation? features a number of insights from experts at the forefront of the
blockchain and DeFi space.
This report ultimately poses that while it may still be too early to predict
what exactly the intersection of centralised financial institutions and
DeFi will look like further on down the road, it is becoming increasingly
clear that DeFi has the potential to replace large swaths of traditional
finance with easier and borderless digital payment methods and other
optimised financial services – providing huge benefits across the supply
chain and to trade. Governments and banks will have no choice but to
innovate or risk being replaced. These innovations will have obvious
knock-on reform effects for countless industries, including global trade,
as DeFi-based trade finance solutions will empower SMEs and other
often sidelined parties to become part of the global value chain. As
such, DeFi truly serves as a ‘tool for all’ by evening the playing field and
making financial tools and services accessible to anyone with an internet
connection. And yet, in order to usher in the aforementioned changes,
regulators must strike a balance between risk mitigation and innovation
through responsible regulation that takes swift action against bad actors
while offering confidence to innovators and market participants alike.

8 9
What is DeFi? What is DeFi?

WHAT
Total value locked across all DeFi protocols and platforms
TVL

IS DEFI?
$350bn

$300bn

$260.91bn
$250bn

Decentralised finance refers to blockchain $200bn

based platforms and products that offer users $150bn

financial services – such as trading, securing $100bn

insurance, and sending, lending and borrowing $50bn

money etc. – without the need for a centralised

authority or a third party. Source: Defi Llama https://defillama.com/home 2020 May Sep 2021 May Sep Nov

As such, DeFi hails the vision of a financial This sizeable space has grown into an
system that functions without intermediaries intricate system of platforms and projects
(banks, insurances, clearinghouses). Most that look to solve many of the problems
DeFi platforms/products fall into the dapp and break through the barriers posed by
(decentralised applications) category. traditional financial institutions. Throughout
These applications are built on top of smart the past 18 months, new users have flocked
contract-enriched blockchains that allow for to decentralised exchanges in drones: the
the governance and execution of a variety of DeFi space currently boasts some 4.1 million

$260.91bn 249%
transaction types, including loans, trades, etc. active user addresses that have interacted
without the need for centralised infrastructure. with the top DeFi projects, a 249% increase
It is this decentralised governance mechanism since the beginning of this year.

the total number that allows users to execute transactions at

far lower fees than both traditional financial
increase in active
of assets/underlying institutions as well as other fintech applications. user addresses that
supply currently At this point in time, the most common types have interacted with
being staked across of DeFi platforms include lending platforms the top DeFi projects
and decentralised exchanges. DeFi initially
all DeFi protocols started getting serious traction in 2020, and since the beginning
and platforms has continued its steady incline ever since. Back
in 2020, the total value locked (that is, the total
of this year.
number of assets/underlying supply currently
being staked) across all DeFi protocols and
platforms had reached a peak of $20 billion
USD. As of November 2021, that number has
now reached a staggering $260.91 billion USD.

10 11
What is DeFi? What is DeFi?

Total DeFi users over time

EXPERT CONTRIBUTION
Total users
4,131,294
Incompatibility as Opportunity
The commercial banking system reminds me of the band
aboard the sinking Titanic, playing on like nothing’s happening
while the “unsinkable” ship is headed straight for the bottom
Josef Holm of the ocean. Similar to the music industry in the early 2000s,
Founding Partner banks have failed to innovate. They have not taken advantage
at Draper Goren of technological innovation, continued to provide slow and
Holm expensive services, and, most importantly, they have failed to
put their customers first.

It comes as no surprise that banks like Wells Fargo, Bank

of America, and JP Morgan Chase frequently lead the top
Jan 2018 Jul 2018 Jan 2019 Jul 2019 Jan 2020 Jul 2020 Jan 2021 Jul 2021 Oct 2021 lists of most hated companies in the United States. People
understandably perceive banks as greedy, dishonest, and
Source: Dune Analytics https://dune.xyz/queries/2972/5739 unethical.

Modern banks are opaque by design; they are predatory systems

and their business models depend on people not understanding
how money works but instead just trusting them.
In light of this dramatic growth, it is no
surprise that venture capital companies “It is well enough that people of the nation do not understand
are eagerly and actively investing in this our banking and monetary system, for if they did, I believe there
booming space. Cointelegraph’s 2020 would be a revolution before tomorrow morning.” Henry Ford
Blockchain Venture Capital Report found
that of the 676 registered blockchain VC Decentralised Finance is the exact opposite; it is transparent and
Investment deals that were made that year, trustless by design. Code and smart contracts are open-source
over 100 projects – roughly 15% – had a and auditable by anyone. DeFi incentivises people to learn about
DeFi link. The underlying signal is clear: money, wallets, blockchains, and the different financial products
VCs are banking VCs are banking on DeFi’s continuous available to them. This boosts financial literacy and social
on DeFi’s growth trajectory. mobility.

continuous From equity investments to broader Instead of giving their inflationary Fiat money to a bank for a

growth trajectory product offerings tailored to the desires

of investors, VCs are actively crafting their
fee or at zero or negative interest rates, DeFi users invest, stake,
loan, or borrow against their crypto and make their money work
responses to this booming sector. The for them. For the first time in history, powerful tools are available
following two expert contributions offers to the masses that have the potential to liberate the world
insights from two such VC that currently from the shackles of the financial system. Very soon people
place a particular focus on DeFi won’t need banks anymore - and as it turns out neither will
governments.

Historians will look back at this time and note that it was the
governments with their move into CBDCs rather than DeFi that
has marked the end of the commercial banking system.

12 13
What is DeFi? Substitute vs. Supplement

“There will be no SUBSTITUTE

future for DeFi
without compliance” VS.
SUPPLEMENT
The only reason banks were able to do what they did was DeFi has repeatedly been hailed as a
because of their de facto monopoly on money and their
importance to the governments they were serving; an unsavory revolutionary tool that is poised to reshape the
alliance that is now coming to an end.
financial sector at its very core.
On a macro level, governments are sometimes smarter than
they get credit for, and sacrificing the banking system in lieu
of a central bank currency is proof of that. Albeit the public
fear-mongering, behind closed doors, governments don’t Its innovative dapps (decentralised apps)
oppose DeFi from a philosophical point of view, they are mostly empower both individuals and companies to
concerned by their inability to collect taxes and to a much access many of the basic services offered by
lesser degree, they also have unfounded worries about crimes banks, such as lending & borrowing, securing
and the funding of terrorism. insurance, trading derivatives, and more. Are the
hopes for a DeFi revolution realistic? And if so,
Many DeFi platforms and users are facing the tough decision what does this mean for the traditional financial
of whether to become KYC/AML compliant in an effort to institutions that would face steep competition

60%
appease the regulators and avoid heavy-handed government from the solutions offered by DeFi platforms?
crackdowns. There is likely going to be a period of division
between those who value anonymity, a core principle of DeFi’s boom in over the past 18 months was
DeFi, and those who see that regulatory compliance is a
huge opportunity to reach not just retail but deep-pocketed
of DeFi made particularly significant by the types
of players that entered the space. What was
institutional investors alike. transactions initially dismissed by traditional financial
players as a niche community (DeFi) within
While the libertarian in me wants the government to stay out
were large another niche community (blockchain) of tech
DeFi and let a free market establish itself without regulation. institutional enthusiasts has attracted a significant number
The realist in me accepts that there will be no future for DeFi of large institutional players, and along with
without compliance, and speaking for the Draper Goren Holm transactions by them, large transaction volumes. By Q2 2021,
venture fund, we would not invest in DeFi platforms that are not
on board with becoming compliant.
Q2 2021 large institutional transactions (above $10
million USD) accounted for over 60% of DeFi
transactions, compared to less than 50% of all
cryptocurrency transactions. Thus, it seems
as though DeFi is disproportionately more
popular amongst larger investors than the
cryptocurrency space as a whole. This is further
supported by the fact that countries with the
largest professional and institutional markets
consistently contribute the biggest share of
DeFi activity.

14 15
Substitute vs. Supplement

Share of total transaction volume by transaction size for all These numbers reveal a reality, and point
cryptocurrency activity to a potential future, that may be far more
troublesome for traditional financial players
60% than they themselves anticipated should
they choose to remain on the sidelines. The
growing number of institutional players that
actively participate in DeFi represents a key
40% shift in the recognition of the space as a
legitimate alternative to existing systems and
Institutional processes that are outdated and riddled with
interest in DeFi intermediaries, and thus goes far beyond the
presupposed limits of the enthusiastic tech-
could signal a
20%
crowd. It implies that traditional financial

paradigm shift, players stand to lose not just retail and

commercial business from individual users

0%
with traditional that opt for DeFi solutions in lieu of traditional
services, but also hints at an impending
Q2020 3 Q2020 4 Q2021 1 Q2021 2
financial players competition for large institutional clientele.
Large Institutional Professional Large Small
institutional retail retail facing significant
The following three expert contributions offer
competition a closer look at both why DeFi solutions are
Share of total transaction volume by transaction size for DeFi so attractive to individuals and institutional
cryptocurrency activity clients alike, and why traditional players should
be eager to get some skin in the game or risk
80% losing out entirely. The expert contributions
are followed by three insights from startups
building DeFi solutions, wherein they share
their vision of a DeFi enabled future.
60%

40%

20%

0%
Q2020 3 Q2020 4 Q2021 1 Q2021 2

Large Institutional Professional Large Small

institutional retail retail

Source: Chain Analysis https://blog.chainalysis.com/reports/2021-global-defi-adoption-index

16 17
Substitute vs. Supplement Substitute vs. Supplement

EXPERT CONTRIBUTION “DeFi protocols and applications

make it possible to create markets
DeFi and the Dawn of Personal and connect market participants”
Financial Services

The overwhelming trend in financial services today is a strong move their funds from one place to another to take advantage
Mauro Casellini digital push – and a push towards personalisation. From global of market opportunities – when they want, where they want.
CEO players like UBS and Goldman Sachs down to boutique asset Soon interoperability protocols such as Polkadot and Cosmos will
of Bitcoin Suisse managers and investment advisers, there is no doubt that giving broaden the spectrum of possibilities even more.
Liechtenstein clients what they want, when they want it is the best way to meet
their needs. In the words of the long-running Burger King advert – it Personalisation does not come without its price, however, as many
is nice to “have it your way.” will notice. Complete and utter control over money, especially in
digital form, may not be easy to handle, especially in a first stage.
Decentralised finance (DeFi) fits into this trend perfectly. After Decentralised finance still has a steep learning curve – even as
Satoshi Nakomoto helped introduce Bitcoin to the world as a opportunities in the space change and evolve and new protocols
way to put self-sovereign money into the hands of individuals, emerge.
the pioneering builders of DeFi protocols – MakerDAO, Aave,
Compound and Curve to name but a few – have taken the vision a But as the world of DeFi continues to grow, it will remain a driving
step further by allowing people to borrow, lend, create insurance force in support of individual financial freedom and personalisation
and earn with crypto assets – when they want, where they want. – the kind of personalisation that goes well beyond simply being
The open and trustless nature of blockchain technology has given able to choose what you want on your burger.
Ian Simpson individuals – whether in the City of London or in the backwaters
Senior of the Congo – the possibility to participate in potentially lucrative
Marketing & financial systems with few, if any, large barriers to entry.
Communications
Manager at Of course, traditional financial actors are not ignorant of this
Bitcoin Suisse potentially disruptive development. Their focus on digital and
personalisation has so far been mostly on offering a smooth mobile
experience for e-banking or presenting clients with a tailored
investment offering.

But DeFi offers more than that. With a truly global base-layer
technology in the form of a public blockchain like Ethereum, Tezos
or Cardano, DeFi protocols and applications make it possible to
create markets and connect market participants around the world
– in a fraction of a second – and without the many, sometimes
needless, encumberments that can prevent the free flow of capital
based on the desires of those who hold it.

The paradigm shift which is playing out in this space is a significant

one. Now “financial services” are centred around the actors that
wish to interact with each other, not around one single institution
or one single national market. The principle of composability
allows the connection of multiple decentralised applications which
share the same base layer. This gives DeFi users the possibility to

18 19
Substitute vs. Supplement Substitute vs. Supplement

EXPERT CONTRIBUTION online banking and payment services with names like Google Pay
and Revolut, or trading apps like Robinhood, the changes are not
sufficient to the masses who do not trust in banks or cannot access
Is DeFi an alternative to traditional a bank or capital markets. The improvements are made on old tech
finance or will it ultimately be integrated of banks running on systems built before the internet on proprietary
architecture versus an interoperable tech stack.
into classic financial institutions?

Katie Richards Let’s first look at the value proposition of classical financial
CEO at Cyber institutions before the 2008 financial crises. We went to banks for
Propietary Interoperable
Capital two main reasons; it was a safe place to keep our money and we Asset Issuer
could borrow money to repay it at a later date. Up until that time,
there were no other mainstream alternatives.

Loss of trust in centralised institutions

The collapse of the centralised institutions and capital markets
system in 2008, sent shock waves around the world. Institutions we
believed in as trustworthy, with supposedly solid governance, risk
Unified FInancial Protocol
frameworks and layers of regulatory bodies, failed us to the cost
to the American people alone of “at least $20 trillion.” Millennials
learned to distrust banks because of the home foreclosures and
lost savings their parents lived through. Scepticism towards banks
crept in.

A new form of trust

At the height of the financial crisis, a viable alternative arrived. Asset Owner
The ground-breaking and disruptive technology of blockchain
and the peer-to-peer (P2P) electronic «trust-less» cash system
of Bitcoin emerged. Cryptography and consensus mechanisms The interoperability of a decentralized financial system can be substantially improved by issues digital assets
with a unified language
across a decentralised network of computer could disintermediate
intermediaries such as banks, brokers or exchanges to optimise
the payment transaction process using bitcoin without a single DeFi’s interoperable architecture allows it to go three steps beyond
entity in control. This new digital trust model built on a new tech the reach of classic financial institutions to:
stack working across the internet is a global, instant, safer, 24/7
alternative to classic payments, at a fraction of the cost. • Focus on the underlying architecture at the core of financial services
and the way financial products and services are manufactured
A new paradigm – beyond Fintech
DeFi’s value proposition promises a full-fledged capital market using • Expand the definition of financial instruments to include crypto-
public distributed ledger technology built to change how financials or digital-assets that can represent anything of value or a legal
products are manufactured and accessed. It is challenging and right like intellectual property. The DeFi instrument universe
rebuilding the ‘how’ we do things in finance. It is not reinventing the considers both tradeable and non- or less-tradeable assets like art
underlying economic needs and activities to pay for something, save (NFTs), real estate, cars or wine.
for the future, trade or exchange in a market place or invest money
to grow. • Solve the problem of social inclusion: where everyone in the world
can have access to financial services in the blockchain ecosystem
Although the massive investments made in Fintech over the last 10- through the internet and a smart phone. Individuals can be their
20 years are bringing results through our phones with robo-advisors, own bank - in the driver’s seat.

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Substitute vs. Supplement Substitute vs. Supplement

The CeFi-DeFi Bridge Conclusion

Substitute or Supplement? DeFi will become a complement to DeFi offers immense promise to allow us to reimagine how to build
traditional finance. A different form of ‘Open Banking’ will emerge things, not only in banking and insurance but with any use-case
with a strong co-existence and reliance between traditional across industries where contractual arrangements are involved.
and blockchain ecosystems. Digital value will flow through Built mainly on the Ethereum blockchain, DeFi’s decentralisation
regulated digital asset gateways designed in a balanced way to serves an alternative for members of the global society who distrust
respect users’ rights to privacy, developers’ need to innovate centralised institutions for the many who are unbanked or non-
and regulators’ role and responsibility to establish and monitor banked.
compliance for technical, safety and quality standards.
DeFi is transparent, non-custodial, permissionless, cheaper and
The CeFi-DeFi bridge will play an important role as a digital assets available 24/7. It builds robust flexible systems for users to choose
gateway between the traditional and blockchain ecosystems. DeFi financial options that give them the most financial freedom and with
stands to benefit from CeFi’s massive liquidity potential through ease through a phone and internet connection.
the tokenisation of its volume of real-world assets. And CeFi
stands to greatly benefit from product development by tokenising Millennials and the tech-savvy are more likely to adopt DeFi,
assets from its customer base and lower processing costs with however, many Gen Xers are actually the driving force behind
greater use of on-chain smart contract automation. mainstream adoption by bridging the new and old worlds of finance.
And yet, not everyone has the time to do their own crypto research
nor wants to fiddle with self-custody and potential loss of their
private keys. Classic financial institutions will play an important role
in the evolution of digital finance and clients are happy to continue
Traditional Ecosystem Blockchain Ecosystem
their relationships with their broker or asset manager to help them
navigate through the expanding world of digital assets.

Centralized Finance Digital Assets Dentralized Finance

DeFi moves on at speed with open plug & play building blocks and
Gateway
protocol standards for the interoperability of financial assets to
achieve one goal: that finance speaks one language, not only for
off-chain

on-chain
CeFi FIAT Cefi - Defi Crypto / tokens Defi solutions for developers and one-click UX solutions for users, but for
Institutions Protocols
Bridge
also for regulatory bodies.

From lending and borrowing platforms to stablecoins and tokenised

FIAT currencies and on/off ramps Cryptocurrencies and
other real world assets e.g. exchanges synthesis BTC, the DeFi ecosystem has launched an expansive network of
integrated protocols and financial instruments that traditional finance
tech stack cannot reproduce. However, the opportunity to learn,
data oracles - wallets - tokenization - stablecoins collaborate, leverage and integrate cryptocurrencies and DeFi into
traditional product and service offerings for clients is massive.

“The CeFi-DeFi bridge will play an important “DeFi is transparent, non-custodial,

role as a digital assets gateway between the permissionless, cheaper and
traditional and blockchain ecosystems.” available 24/7.”

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Substitute vs. Supplement Substitute vs. Supplement

EXPERT CONTRIBUTION a regulatory standpoint the Financial Action Task Force found
that 58 out of 128 jurisdictions signed up to the task force have
implemented revised FATF Standards, 52 of which are now
Decentralised KYC Solutions Will regulating Virtual Asset Service Providers. Combining these
Reconfigure The Finance Sector and standards with trustless KYC and AML processes will greatly
enhance trust in the space, increasing interactions between DeFi
Prove That DeFi Is Here To Stay and traditional finance.

Rachid Ajaja Traditional financial institutions commit massive resources to KYC One of the key draws of decentralised finance is the reduction in
Co-founder and AML checks every year because they know the legitimacy of the need for the intermediaries traditional finance relies on to verify
& CEO at their industry rests on the findings. These practices are essential for user identities. Blockchain-based trustless KYC solutions allow users
AllianceBlock reducing financial crimes such as money laundering and identity to prove their identity in a protected manner while still retaining
fraud. The rise in online services and value exchange, which has control of their data. Through anonymous identity verification
been accelerated by the Covid-19 pandemic, has increased cross- modules, a user’s identity needs to be verified just once on any
border financial activity. Now more than ever it is essential that the given platform. Across DeFi and traditional finance this solution
right checks are in place to regulate the exchange of value between could save institutions millions of dollars and hundreds of hours.
different jurisdictions.
DeFi and traditional finance can complement each other by
Recent figures show that 10% of the world’s financial institutions facilitating innovation and reducing compliance and regulatory
spend at least $100 million on KYC and customer due diligence costs across borders. In order for DeFi to be accepted as a viable
every year, with some major institutions spending five times and complementary component of finance, it must embrace
this amount. Not only are these checks expensive, they are also industry standards and increase transparency across the board
increasingly time and resource intensive. Findings show that through solutions such as these.
banks are taking an average of 24 days to complete customer
onboarding processes, while another study estimates that risk and
compliance costs account for up to 20% of the total running costs
of major banks. The issue with KYC and AML checks as they stand
is that they are not scalable. Data must be constantly revised and
reviewed. Any small change or update has to be reported and, more
importantly, checks cannot be used twice. Every time a verification
is required, the bank or institution has to conduct the same due
diligence.

Despite causing significant logistical issues for traditional financial

institutions, these checks are far more advanced there than they
are in decentralised finance (DeFi). The bourjaning DeFi market is

10%
still a relatively new space, meaning that regulators and operators
are not subject to the same scrutiny and standards as within
traditional finance. Decentralised exchanges enable users to buy
tokens with fiat currency, withdraw money, and trade and transfer
different coins. Yet they are not forced to follow the same customer
of the world’s financial
verification requirements as traditional banks. Indeed, a global institutions spend at least
study found that 56% of virtual assets service providers had weak
KYC procedures. $100 million on KYC and
DeFi will struggle to be embraced as a viable financial resource
customer due diligence
unless it embraces the checks that will ensure legitimacy. From every year

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Substitute vs. Supplement Substitute vs. Supplement

A LOOK INTO THE

FUTURE – INSIGHTS
FROM THREE DEFI
STARTUPS BUILDING Let us briefly consider them:

ON TEZOS Legal uncertainty

DeFi solutions are decentralised, censorship-resistant, and
transparent. This means that anyone may work with these services
without having to reveal their identity. Its paradigm is quite
different from that of CeFi. The current level of legal regulation
EXPERT CONTRIBUTION does not provide clear guidelines for users and organisations on
how to work within the DeFi field.

Decentralised finance (DeFi) applications have become increasingly Getting valid data from the real world
popular since 2017 and are considered by many as the next DeFi works very well if we conduct operations only on the
evolutionary step that will completely replace traditional centralised blockchain. The difficulties start when we try to receive data from
finances (CeFi). other sources, especially when this information is impossible
to verify mathematically. Examples include personal identity
Klykov Vladimir Some of the advantages of DeFi are: validation, the tokenisation of physical assets, and the checking
CMO at of the current state of the collateral. In many cases, we need a
Madfish.solutions • Borderlessness - financial services are not tied to geographic trusted source to conduct a physical verification that can be safely
locations or fiat currencies. These financial services are submitted to the blockchain.
accessible by anyone across the globe.
Technical literacy
• Transparency - anyone may review the smart contracts’ codes Users of DeFi need to understand what blockchain is, how their
and check the financial data. Replacing financial intermediaries wallets work, how to evaluate projects, how to protect a seed
with code results in a significant increase in trust in DeFi phrase, etc. For many, this is an insurmountable barrier to getting
services and decreases operational costs. started. This is how crypto currently works and, sometimes, the
learning curve is too expensive for people.
• Innovativeness - most DeFi services are open source and
allow developers to re-use their technologies and build new
solutions. This significantly speeds up innovation and helps Can DeFi be a substitute for CeFi?
companies to quickly create new cost-effective products for Although DeFi is currently very different from CeFi, banks and other
their customers. financial institutions may benefit from collaboration with the DeFi
industry. CeFi can act as a bridge that connects ordinary users with
• Instant liquidity access - permissionless DeFi architecture various DeFi tools. In this case, financial institutions would not need
allows companies to get instant access to the high liquidity to come up with new services, collect liquidity, or create a complex
volume in decentralised services. technical infrastructure. They could simply provide interfaces for
interacting with DeFi, verify user identities, and tokenise assets. DeFi
However, the DeFi industry is still young and faces some issues that can also offer many hedging tools, such as options and derivatives,
have already been solved by CeFi. which can be used to secure bank transactions.

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EXPERT CONTRIBUTION We believe in a fully automated issuance of financial products

without the need for intermediaries. Automation, APIs, and cost
efficiency should offer the potential for currently underserved
For the most part, we live in a world that has become digitised way markets.
more than people would have imagined 20 or even 30 years ago.
We carry supercomputers in our pockets almost 24/7 with access Solutions should be peer-to-peer where feasible and open to
to even more powerful computers at the stroke of a touchscreen. traditional financial intermediaries to provide liquidity where
However, traditional finance has not been truly disrupted. necessary. The cost and revenue model should be transparent
Werner Processes are inefficient, salaries and cost structures are still high, and without conflicts of interest. There needs to be an efficient
Brönnimann and internal innovation carries the stigma of self-cannibalisation. way to deal with counterparty credit risk.
Co-Founder Many players in traditional finance talk about digital transformation
at Ubinetic and innovation but mainly do patchwork. We believe that the Youves platform is on an excellent track
to match these goals. It is a decentralised, self-governing, and
Too many intermediaries make a living off the sector without non-custodial platform for the creation and management of
adding any actual value for the final customer. It is typically hard synthetic assets.
for smaller players to free up the resources to work on projects
that will not affect their bottom line for a while. Larger players
often fund costly innovation hubs which mimic startups, but
their products usually directly compete with the companies’ core
businesses. So, they tend to be deployed with less than 100% effort EXPERT CONTRIBUTION
or not at all. Also, the proprietary solutions that some players offer
often contain conflicts of interest.
Decentralised finance (DeFi) provides universal access to financial
In many ways, traditional finance acts as if the profound changes services by transferring the trust layer from financial intermediaries
of the internet never really happened. The situation in finance to software and code on the blockchain. Different DeFi protocols
could be compared to the one of daily staples retail in the post- offer services, including borrowing, yield farming, crypto lending,
war period before big supermarket chains started appearing or asset storage and more.
the situation of book retail in the 90s before Amazon began to Bernd Oostrum
outcompete the space with a supreme user experience at low Co-Founder Today, the majority of DeFi protocols run on Ethereum. The rising
costs. at Plenty DeFi gas fees, waiting time, and congestion in the network have resulted
in developers and users alike yearning for blockchains like Tezos,
Fintech was looking to solve this problem, but there are still only a that can perform better than Ethereum, if not replace it.
few well established and purely digital players in the space. Many
fintech providers suffer because they offer solutions that many Tezos consumes over two million times less energy than Proof
clients perceive as nice but not as necessary. Also, when offering of Work blockchains like Bitcoin or Ethereum and is the only
traditionally centralised solutions, the trust required to deal with blockchain with a robust and efficient on-chain governance system
people’s savings does not always chime well with the start-up for forkless upgrades. The minimal carbon footprint of Tezos
credo of “move fast and break things”. means developers and users can prioritise innovation, without
compromising sustainability. Smart contract activity has been
Blockchain effectively provides the missing link to finally having an growing exponentially on the Tezos network thanks to popular NFT
internet of money, an internet of decentralised solutions and the platforms like Hic et Nunc and DeFi applications like Plenty DeFi. In
ability to create trust through code. There are several platforms the past 4 months, smart contract calls have grown 363%.
offering solutions that are currently available. But we feel that
many of them suffer from one or several of the following issues: The potential of DeFi products and solutions is unparalleled.
get rich quick schemes, counter-intuitive payoff designs, thinly The massive influx of users and capital into the DeFi space is a
veiled wealth transfer schemes, disregard for financial economics testament to its potential. Keeping in mind the brief past, it is a no-
and lack of industry knowledge. brainer to envision DeFi going to the moon.

28 29
A Tool for All A Tool for All

A TOOL 200 million 100 million 10 million 1 million

FOR ALL
According to the World Bank, ca. 1.7
billion adults currently do not have
access to banking services. A large
number of these individuals reside in
developing nations that may lack the
infrastructure as well as the political
and economic stability to provide them
with access to trusted baking services.
DeFi circumvents many of these issues,
with comparably low barriers to entry
(one simply requires electricity,
a smart phone and a working
internet connection).

As such, DeFi has often

been heralded as the ideal
harbinger of financial inclusion
within developing markets. And yet,
what will it take to successfully reach
unbanked adult users in these markets?
And how does this differ from strategies
that can achieve mass adoption in
developed markets?

1.7bn
adults globally do
not have access to
banking services. Source: Global Findex Database https://globalfindex.worldbank.org/

30 31
The Infrastructure Question The Infrastructure Question

THE World Internet usage and population statistics Q3 2020 estimates

INFRASTRUCTURE 150%

QUESTION 100%

When it comes to DeFi’s potential in the that are currently being waged between
developing world, the lack of existing disruptive new DeFi platforms and the traditional
infrastructure (in the form of both trusted financial industry in the developed world. Rather 50%

financial institutions and physical technical than displacing existing services, DeFi opens the
infrastructure) is both a blessing and a curse. door to a flood of new potential users that have
DeFi need not fight many of the same battles no or limited alternatives at their disposal.
0%

Africa Asia Europe Latin America/ Middle East North America Oceania/
Share of the population using the Internet, 2019 Caribbean Australia

All individuals who have used the internet in the last 3 months are counted as Internet users. The Internet can be used via a computer,
mobile phone, personal digital assistant, games machine, digital TV etc.
Source: Do 4 Africa https://www.do4africa.org/en/digital-literacy-in-africa/8961/ Large Retail Small Retail

So, what does this mean for DeFi’s overall

potential in the developing world? Crossing
the digital divide is paramount if DeFi is
going to achieve mass adoption amongst the
general population. The good news seems to
be that while the overall internet penetration
rate in the developing world may be low at
the moment, it is growing steadily, and in
the case of Africa, by leaps and bounds. The
In emerging result: an immense opportunity for emerging
markets with technology to partner its solutions with
emerging economies.
billions of users on
No data 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% smart phones, and The following expert contribution explores
how DeFi projects are gearing up to seize

Source: Our World in Data https://ourworldindata.org/internet

already adopters this opportunity.

of FinTech, the leap

However, the lack of infrastructure also means And yet, limited internet access makes the to DeFi is smaller
that certain key elements, most notably a actual implementation of DeFi alternatives
stable internet connection, may be lacking. challenging. One such example is Sub Saharan than in developed
Africa serves as a prime example for a
huge potential market of unbanked users
Africa, where, according to the World Bank,
less than 30% of the population has access to
markets
in dire need of access to financial services. electricity (let alone internet).

32 33
The Infrastructure Question The Infrastructure Question

EXPERT CONTRIBUTION show that the entire ecosystem would really benefit from more
governmental transparency, reliable frameworks and knowledge
about blockchain innovations. A lack thereof really does restrict
DeFi represents the next generation of financial services with innovation.
applications outside financial products. Think of integrated
solutions for digital identity, reporting, compliance, and asset We fully acknowledge the subject matter is complex but are
management. Ambitions and realities align better and better, here to deliver insights and jointly form solutions and help
firms are complying more with regulations, entities request and shape regulation. Our role in The Proof of Stake Alliance is
Frederik receive licenses from governing bodies. Yes, some DeFi platforms perhaps a useful example. It was formed to bring legal and
Gregaard still lack proper KYC standards or worse: operate in a grey area, regulatory clarity around Proof of Stake protocols. One example
CEO of the but the trend is clear: it’s an industry growing more mature by of our work there has been sending the US Securities and
Cardano the day. Exchange Commission (SEC) a whitepaper outlining how proof-
Foundation of-stake networks provide infrastructure services rather than
We see this trend in the financial markets, too: of the top 100 financial products. Following this, a group of Congressmen has
banks measured by assets under management, 55 have invested now formally requested the US Internal Revenue Service (IRS)
in cryptocurrency and/or blockchain-related companies. It is but to issue better guidance for taxpayers participating in staking.
a given DeFi will integrate into traditional institutions rather than
DeFi becoming a one-on-one alternative to it as some conceive. Countries that can provide clarity and careful consideration
It’s really an impressive evolution, as developed countries with on taxes can become a major innovation hub for blockchain
established financial infrastructures tend to be more resistant to companies. It’s probably not much of a surprise that we look
innovation. out into the future with confidence, as we work hard on making
sure the fruits of this amazing innovation are distributed
But implementation there is not nearly as impressive as what is sensibly and evenly.
happening in the developing world. In countries with a broken
or nonexistent financial infrastructure, blockchain’s open
source nature and scalability are more easily adopted and thus
quickly more impactful. You see this in the peer-to-peer trading
volume in Nigeria or in a country like Ethiopia, where Cardano
partnered with the government to implement a blockchain-
based identification tool that also verifies students’ grades,
tracks school performance, and boosts employment. It’s not
a coincidence many in the developing world collaborate with
Cardano with the goal of seizing the potential to leapfrog their
national (financial) infrastructure.

Therefore, shaping the policies and industry standards in

55 of top 100
managing crypto assets on the African continent has become
a key part of our strategy at the Cardano Foundation. It’s a
challenge. Regulators need to develop appropriate measures
that don’t stifle innovation. Some succeed. We see countries like
Malta, Switzerland, or US states like Wyoming and Texas provide
banks have
environments fostering blockchain-based companies to innovate. invested in
Reliable, regulatory frameworks are crucial there. But we also
saw a heated and complex debate take place in the US Senate cryptocurrency or
in early August over if and how to tax a variety of crypto-related
businesses. And then there’s China, where the government is
blockchain related
suddenly cracking down on Proof of Work mining. Both examples companies

34 35
DeFi and Global Trade DeFi and Global Trade

DEFI AND EXPERT CONTRIBUTION

GLOBAL TRADE Blockchain Powered Trade Finance

Anybody in the world that says trade finance systems would not
benefit from being powered by blockchain technology would
While the challenges for DeFi vary amongst be laughed at today by industry professionals who understand
developed and developing economies, its potential Saeed Hareb fintech. Perhaps a few years ago the technology was not
Al Darmaki developed enough to efficiently support trade finance however
for global trade and specifically trade finance Founder at that is no longer the case especially with third generation
Sheesha Finance
transcends economic development status. & Managing
blockchains such as Casper, Tezos and Solana amongst many
others coming out and being developed with institutional users
Director MENA at as their target. Rapid development of existing blockchains such
CasperLabs as Hyperledger Fabric and R3 Corda has also strengthened the
The underlying catalyst? Globalisation. Indeed, which they may secure financing, such as confidence in the technology in general.
the dawn of an increasingly interconnected access to liquidity and funding by converting
world, where products flow across continents the value of physical assets into digital tokens In the MENA region at the federal level, the central banks of the
and oceans to serve a global consumer base that may serve as collateral. Beyond that, UAE (CBUAE) and Saudi Arabia (SAMA) clearly see the potential
has created ideal conditions for decentralised DeFi smart contracts could drastically reduce of blockchain technology by working together on project Aber,
trade finance. According to the Trade Finance the amount of paperwork involved in trade focusing on payments between them, domestic payments
Market Outlook 2027, approximately 80-90% finance processes (e.g. smart contracts that between local banks and cross border payments between retail
of world trade depends on trade finance, an serve as letters of credit) and reducing, if not banks. Internationally, commercial banks such as HSBC, ING,
industry valued at a staggering 8,942.27 billion eliminating, the need for intermediaries. OCBC, United Overseas Bank, ANZ, BNP Paribas, Industrial and
USD in 2019. Commercial Bank of China, MUFG and Standard Chartered Bank
The following expert contribution takes a have all completed successful trade finance transactions using
And yet, despite the ever-expanding size of the closer look at DeFi’s role in trade finance. blockchain technology albeit at a relatively small scale. Examples
global market and the general standardisation of banks in the UAE that are embracing blockchain technology
of administrative standards, goods, and for trade finance activities are: ADCB, FAB, NBF, CBI, Emirates
infrastructure, certain processes remain NBD, Rakbank, Mashreq and CBD. The most common use case of
painstaking and laborious, particularly with blockchain technology in trade finance is letters of credit where
regards to payment transactions along supply trade documents are digitised, electronically signed and shared
chains. Further, exporters/importers from less- on a real time basis between international parties involved in the
developed nations as well as smaller businesses transaction.
in both developing and developed nations
continue to pay higher fees and face barriers Some of the clear benefits that come with using blockchain
to entry, as the intricate web of buyers, sellers, in trade finance include transparency between international
banks and insurances responsible for maintaining parties involved in transactions, reduced costs in cross border
liquidity in the international trade landscape transactions, significant reduction in errors in documents related
favors large enterprises. Small and Medium Sized to those transactions as well as greater speeds in transfer
Enterprises (SMEs) continue to struggle in their
attempts to secure loans and lines of credit from
banks, as they often lack the necessary collateral
80-90% of those documents. Whilst there are numerous benefits of
using blockchain technology one cannot deny that are also
challenges with using it as would be the case with most emerging
assets and thus serve as a riskier investment. of world trade technologies. Those challenges include lack of interoperability

DeFi comes to the aid of these disadvantaged

depends on trade and standardisation between blockchain protocols to a level
where widespread adoption is possible. Regulatory standards and
groups by opening alternative channels through finance legal systems are yet to catch up with the technology and remain

36 37
DeFi and Global Trade Regulating a New Frontier

unclear in many jurisdictions globally; MENA region countries

have been proactive and exceptional with examples being the REGULATING
A NEW FRONTIER
UAE and Bahrain. Integrating blockchain with existing legacy
systems and maintaining the architecture is also complex and
requires significant resources.

Trade Finance is clearly ripe for disruption by blockchain

technology similar to other major financial service markets such For regulators, new technology is always a
as money remittance, banking and supply chain. Those entities challenge, one that often requires a fresh approach.
that put in the substantial money, time and effort that is required
to implement and maintain blockchain systems will in the long
run be clear winners and take up significant market share.
Organisations that fail to see the technological tide coming in will DeFi is no exception in this regard. While
be overtaken and lament the lost opportunity. There is still some DeFi itself promises significant benefits from
time left before that tide comes in so my advice to players in democratised access to financial products,
these markets would be to at least be educated to a level where improved market efficiency, easier access to
making the required investment and necessary changes will be liquidity, enhanced financial privacy, and faster
fast enough to avoid that scenario! innovation, it also comes with potential risks:
networks are decentralised and global, and
do not require interaction with the regulated

Many jurisdictions financial system or other national legal regimes,

such as taxation and national identity systems.
struggle to develop Thus, issues such as fraud, money laundering
and illicit activity, which are often linked to the
appropriate world of cryptocurrencies, are also cause for
measures for DeFi concern within the DeFi space.

without hindering It is therefore no surprise that DeFi has

innovation, while proven to be the subject of ongoing debate

as regulators struggle to ensure that projects
blockchain friendly operating in the space offer the necessary
protections to their clients. In August 2021,
nations such as UAE Gary Gensler, Chair of the US Securities and
and Switzerland are Exchange Commission, called on Congress
to grant the SEC more authority to police
working towards cryptocurrency platforms. Gensler compared

smart regulation and crypto markets to the “Wild West,” stating that
this asset class is “rife with fraud, scams and
Confidence in enforcement. abuse in certain applications.” This sentiment
seems to have tangible consequences:
Blockchain powered Coinbase, the crypto exchange which
trade finance is high, successfully debuted with a direct listing on
Nasdaq back in Spring of 2021, announced
but standardisation and the delay of its “Lend” product (which allows

interoperability are key users to earn interest by lending digital assets

via the platform) following a direct threat
to mass adoption from the SEC. In 2021, consumer financing

38 39
Regulating a New Frontier Regulating a New Frontier

services provider BlockFi received a cease and grants bespoke licenses for blockchain- EXPERT CONTRIBUTION
desist order from the New Jersey Bureau of related businesses. The close collaboration
Securities which demanded that the startup between SCA, DMCC and other industry
stop offering their interest bearing accounts, experts demonstrates a clear commitment Despite the global pandemic and other major events which weigh
which had raised a total of $14.7 billion USD to developing an integrated blockchain heavily upon us as a global humankind I believe it is still fair to
from investors. ecosystem. While these moves make it say that we live in one of the most exciting and fascinating of
easier for blockchain companies to set up times. If we look at what is going on beyond the surface, one of
Indeed, the US is not the only jurisdiction and operate in Dubai, authorities are equally the most interesting aspects is the amount of change that occurs
grappling with crypto markets and platforms, keen to ensure that a number of protections Dr. Guenther in such a short time and which is driven by the adoption of so-
and the industry is working hard to engage are in place to meet the flood of projects Dobrauz called exponential technologies. Truly there has been a remarkable
with and educate regulatory authorities both these regulatory changes has attracted. In Partner and amount of activity—founding, funding, acquisitions, and record
individually and collectively through bodies October 2021, the Dubai Police announced Leader PwC Legal valuations—from organisations being built on foundations of
such as the International Organisation of that it will be collaborating with a local SwitzerlandHolm exponential technologies including AI, blockchain, IoT, 3D printing
Securities Commissions (IOSCO). exchange and other industry experts in and most certainly also blockchain.
order to fight crime within the crypto space
Thus, the key question remains, how can via its Virtual Asset Crime Section. It is both
regulators develop and introduce appropriate notable and exemplary that once again, UAE
Exponential Technologies by Singularity University/PwC
measures for emerging DeFi solutions authorities chose to work closely with the
without stymying innovation? A number of industry in order to ensure smart regulation Interface of things
jurisdictions have forged ahead with new and enforcement. Advanced (AR/VR/Mixed reality,
Advanced robotics & cognitive Biotechnology/ Energy extended reality, wearables,
legislation that aims to bring a certain degree analytics automation Biomanufacturing Cybersecurity Storage gesture recognition

of regulatory clarity to this new technological The following expert contribution tackles
frontier (Switzerland, home of the so-called this topic in further detail.
Crypto Valley, and the UAE serve as a prime
examples, as do other jurisdictions such as
Singapore and Portugal). These havens serve
as a stark contrast to other jurisdictions (such
as the afore mentioned United States), where
regulatory bodies continue to grapple with 3D printing Advanced Artificial Blockchain Digital design, High performance Internet
(additive materials intelligence simulation, & computing/ Next- of things
DeFi after being caught off guard by the manufacturing) (including machine integration gen Computing (networks,
learning) (Quantum, edge & sensors)
industry’s sudden, exponential growth. fog computing)

The UAE is making significant strides and

fast becoming one of the most blockchain- But is it really disruption we will see or evolution? The starting
friendly nations while also working to ensure point is to distinguish «invention» – the generation of ideas or
that proper regulations are in place in order to concepts for new products or processes - from «innovation»

The UAE
protect users. The launch of the DMCC Crypto – the translation of such new ideas into marketable products
Centre, launched as a partnership between or processes – and indeed from «diffusion» - the widespread
DMCC and CV Labs (a Swiss Venture Capital adoption of these products or processes in the market as Austrian
and Ecosystem firm focused on blockchain), economist Joseph Schumpeter explained. It is also essential to
helped usher in an ever-growing number of
Is fast remember his seminal concept of «creative destruction» which
blockchain/DeFi projects that are flocking to becoming one describes the process of industrial transformation through radical
Dubai. This move was made possible by the innovation. What it essentially means is that the introduction of
signing of a groundbreaking memorandum of the most revolutionary products and services by successful entrepreneurs
of understanding (MoU) with the Securities
and Commodities Authority (SCA) which
blockchain is the fundamental force driving sustained long-term economic
growth but destroys the power of established institutions and
established a regulatory framework that friendly nations organisations in the short term.

40 41
Regulating a New Frontier Regulating a New Frontier

When it comes to innovation, it is by now well established that reduces the number of performance requirements to be met by
this usually arises and follows a certain lifecycle, which has been a product by making many of those requirements implicit in the
expertly summarised by James Utterback in his excellent book design itself. Hence, as the form of the product rapidly becomes
Mastering the Dynamics of Innovation. He points out that the rate of settled, the pace of innovation in the way it is produced quickens.
innovation in a product class or an industry is usually highest during Competition begins to take place on the basis of cost and scale as
its initial, formative phase. During this «fluid phase», as he calls it, a well as of product performance.
great deal of experimentation with product design and operational
characteristics takes place amongst competitors, and much less A firm in possession of collateral assets such as market channels,
attention is given to the processes by which products are made. brand image, and customers switching costs will have some
advantage over its competitors in terms of enforcing its product
As a consequence, the rate of process innovation is significantly as the dominant design. In the ensuing new era of competition,
less rapid at this stage. During this formative period of a new the linkage of product technologies with manufacturing process,
product, the processes used to produce it are usually crude, corporate organisation and strategy, and the structure and
inefficient, and based on a mixture of skilled labour and general- dynamics of an industry is essential. Interestingly, at least with
purpose machinery and tools. At first, an innovation may be almost respect to consumer products, narrowing the difference between
entirely a combination of design elements tried out in earlier uses the outward appearances of a new technology and those of the
or prototypes. Even disruptive innovations, although typically old and familiar can help in creating market success.
originating from outside of the incumbent industry, usually arise in
the context of resembling the technology, products, or processes Before long, the competitive landscape changes from one
they will ultimately replace and hence, at first, are not easily characterised by many firms and many unique designs, to one of
distinguishable. According to Utterback, it is fairly common in new upwards consolidation with only a few firms with similar product
industries of particular assembled products that a pioneering firm designs surviving. At this point, product variety begins to give
gets the ball rolling with its initial product, a growing market begins way to standard designs that have either proven themselves in the
to take shape around it, and new competitors are inspired to enter marketplace as the best form for satisfying user needs, or indeed
and either grow the market further or take a chunk of it with their designs that have been dictated by accepted standards, by legal or
own product versions. No firm has a lock on the market at this early regulatory constraints.
stage and no firm’s product is really perfected. No single firm has
yet mastered the process of manufacturing or achieved unassailable For blockchain applications other than cryptocurrencies we believe
control of the distribution channels. that the point of an introduction of a dominant design has not been
reached yet and the current market seems to proof our point. When
At this stage of the product’s evolution, both producers and we look at the other dimension – regulation – it would indeed also
customers are experimenting. Within this rich mixture of appear that the placement of Switzerland as one of the key markets
experimentation and competition during the fluid phase and was to some significant degree indeed prepared and driven by its
as the market grows, greater emphasis is usually placed on the regulation. Other than for example most of EU-inspired Europe
development of components tailored especially for the product what we brought to the table was more principles-based regulation
itself. Ultimately, these may be synthesised into a model that which allowed our regulator to sit down with each applicant and
includes most features and meets most user requirements. discuss each project in detail and in its specifics to eventually come
Eventually, some center of gravity forms in the shape of a up with a positive or negative ruling a clear way forward. Also, the
dominant design—yet another term coined by Utterback together more recent pieces of regulation follow that idea to some degree
with Abernathy. A dominant design has the effect of enforcing and give hope that the classic Swiss way can be continued.
or encouraging standardisation so that production or other
complementary economies can be sought. It is also important to remember that today the focus of innovation
is increasingly abstract as it transcends its previous areas such
Also, once the dominant design emerges, the basis of competition as purely technical capability, markets, brand, and processes as
changes radically as the industry enters a «transitional phase» in boards become more and more abstract and the talent globally
which the major product innovation slows down, and the rate of connected. Hence, what we increasingly face in today’s blockchain
major process innovations speeds up. A dominant design radically world is so-called «Big-Bang Disruption» which has the potential to

42 43
Regulating a New Frontier Regulating a New Frontier

collapse the product life cycle we know (including Everett Rogers’ In sum: Blockchain as one of the central exponential
classic bell curve of five distinct customer segments—innovators, technologies, and indeed as a future background technology
early adopters, early majority, late majority, and laggards) into very much like electricity or the internet, is clearly driving
only two segments: trial users, who often participate in product change at a new speed. That being said, it is still a tad too early
development, and everyone else. What this means is that where to determine dominant designs which will allow for a big bang
Moore (against the background of the industry dynamics of disruption uptake, maybe also because there are no legal and
his time) focused on making the big leap from targeting early regulatory rules of both sufficient determination and reach fully
adopters to marketing to the early majority, nowadays big-bang in place. But isn’t this what makes it all so exciting? The future
disruptions can be marketed to every segment simultaneously, is decentralised!
right from the start. As such, the adoption curve where these
dynamics can apply has become something closer to a straight
line that heads up and then falls rapidly when saturation is
reached, or a new disruption appears.

Big Bang Market Disruption by Downes & Nunes (2014) in Harvard

Business Review

Global blockchain
and Defi adoption is
inevitable but design
and regulation will
determine when the big
Innovators Early
Adopters
Early
Majority
Late
Majority
Laggards
bang disruption occurs

44 45
Conclusion Conclusion

CONCLUSION

So, what does it all mean? The question of whether DeFi’s These goals are attainable: regulators may walk a fine line
growing stream will merge with the existing river of traditional between regulation and innovative freedom, but a number
finance or carve out its own canyon altogether remains to be of jurisdictions have proven that it is possible. Pioneers such
seen. What is becoming increasingly clear, however, is that as Switzerland and UAE are prime examples of regulatory
DeFi is a force of impending change that traditional players authorities that work alongside industry experts in order to
may choose to ignore at their own peril. The growing number gain a deeper understanding for the technology they aim to
of commercial and institutional players that are opting for DeFi regulate, and thus ensure that they can do so responsibly,
platforms as both alternatives and complements to existing without sacrificing the innovative spirit that seeks to drive
infrastructure hint that the demand for more efficient and the space forward. Similarly, internet adoption and education
flexible financial offerings is real. Traditional players can either initiatives, often supported by government and/or industry
choose to meet hop on board and meet this demand or stand players such as Cardano, in the developing world are opening
by and watch as their market share springs a serious leak. the doors to these markets and thus may soon place DeFi on
the cusp of offering financial tools to swaths of previously
And yet, DeFi’s promises of a decentralised, democratised unbanked individuals.
financial future continues to face two major hurdles. In
the developed world, gaping regulatory questions must Ultimately, DeFi’s success is an endeavor that involves
be addressed in order for projects to forge ahead in an numerous cogs, and its future has monumental implications
environment that offers the necessary protections to their for personal and corporate finance, global trade, human
growing user base. For developing nations, the bigger interconnectivity, and beyond.
challenge here rests in the need for further expansion of
the necessary internet infrastructure, and the subsequent
education/onboarding of its new user base.

46 47
Glossary of Terms Glossary of Terms

GLOSSARY
OF TERMS
Bitcoin: The first ever cryptocurrency based on the proof of work blockchain. Proof of Work (PoW): A protocol for establishing consensus that links
It is the most widely held cryptocurrency. mining capability to computational power wherein the hashing (conversion
of the input function into an encrypted, fixed output) of a block requires
Blockchain: A digital ledger comprised of unchangeable, digitally recorded each miner to solve for a pre-determined variable. The resulting competition
data. The data is held in groups referred to as “blocks” which are chained to between miners raises the difficulty of successfully hashing each block.
each other chronologically using a cryptographic signature. This resulting Miners usually earn rewards for their work (generally measured by the
ledger can be shared with and accessed by anyone with the appropriate computational capacity they had to provide in order to hash a block).
permissions.
Smart Contract: Programmes whose terms/conditions are recorded in a
Cryptocurrency: Digital currency that is based on mathematics and uses computer language instead of legal language, meaning automated actions
encryption techniques to regulate the creation of units of currency as well as that can be coded and executed once a set of conditions is met.
verifying the transfer of funds.
Staking: The process of verifying the correctness of transactions in a PoS
Decentralised Application (dapp): An open-source software application with blockchain where validators lock up a certain amount of cryptocurrency
back-end code that runs on a decentralised peer-to-peer network instead of in the corresponding, and the locked assets are then used to achieve
a centralised server. consensus/ensure the validity of transactions. Participating validators are
subsequently rewarded.
Decentralised Finance (DeFi): Decentralised finance encompasses a wide
array of blockchain-powered platforms and products that provide financial Total Value Locked (TVL): A number which represents the number of assets
services – such as trading, securing insurance, and sending, lending and that are currently being staked in a specific protocol.
borrowing money etc. – without the need for a centralised authority or third
party.

Ethereum: A public blockchain network and decentralised software platform

upon which many developers build and run applications. Its currency, Ether
(ETH) is the second most widely held cryptocurrency.

Proof of Stake (PoS): An alternative protocol for establishing consensus,

in which a so -called “validator” uses their own cryptocurrency to validate
transactions. Validators “stake” their cryptocurrency on the specific Better Markets, (2012 September 15) ”The cost of the Wall Street caused Financial Collapse”.
i

transactions they choose to validate and earn rewards for correctly validating Retrieved from https://bettermarkets.org/sites/default/files/Cost%20Of%20The%20Crisis_2.pdf
a group of transactions (block). Verification of an incorrect transaction ii
Svoboda, Michael. (2019 July 7) “The ACTUS Financial Protocol.” Medium.
generally results in the loss of the amount staked. Retrieved from: https://medium.com/at-par/the-actus-financial-protocol-839a3d8f52dc

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About DMCC
Headquartered in Dubai, DMCC is the world’s most interconnected Free Zone,
and the leading trade and enterprise hub for commodities. Whether developing
vibrant neighbourhoods with world-class property like Jumeirah Lakes Towers
and the much-anticipated Uptown Dubai, or delivering high performance
business services, DMCC provides everything its dynamic community needs to
live, work and thrive. Made for Trade, DMCC is proud to sustain and grow Dubai’s
position as the place to be for global trade today and long into the future.
www.dmcc.ae

About DMCC Crypto Centre

The DMCC Crypto Centre is an ecosystem for companies focused on the
development and application of cryptographic and blockchain technologies.
Guided by progressive regulatory framework, the DMCC Crypto Centre offers a
home to all types and sizes of crypto businesses. The DMCC Crypto Centre also
houses a leading crypto advisory practice and accelerator programme led by CV
Labs, whose Switzerland-based Crypto Valley supported the launch of industry
leaders including Cardano and Ethereum.

About CV Labs
CV Labs is the heartbeat of Crypto Valley, Switzerland’s Blockchain hub.
We help global start-ups, corporates, and investors to leverage Blockchain
technology and to transform their industries. As the international ecosystem
builder of CV VC, we are an intrinsic driver of the fourth industrial revolution.

CV Labs drives CV VCs international ecosystem by executing incubation &

acceleration programs, developing events & summits, delivering advisory &
reports, and providing co-working spaces to the community.
futureoftrade.com
© DMCC 2021