Decentralized Finance (DeFi) is taking the world by storm – and Asia-Pacific is no exception. The region recently saw the launch of the first cryptocurrency-linked payments cards by a major payment vendor, likely prompted by strong interest in digital currency from both businesses and consumers. Central banks in the region have also accelerated their digital currency moves, with China and India leading the pack.
The benefits of a decentralized approach to finance are clear to see. One of the most significant advantages is the elimination of intermediaries. DeFi facilitates direct financial transactions between parties in a secure and rapid manner while offering operational efficiency savings and the opportunity for organisations to bypass hefty handling fees.
With trust, transparency and security at the heart of the DeFi model, it has the potential to drive financial inclusion in the region – particularly for the 24% of the population that remains unbanked – and enable the region to realise its digital hub ambitions.
Distributed Ledger Technology – a golden opportunity to redefine financial trust and transparency
Decentralized Finance marks a departure from the ‘status quo’ of using trusted intermediaries such as settlement agencies in financial transactions. It opts instead for direct dealings between parties based on Distributed Ledger Technology (DLT), which leaves transactional data to be held and accessible by multiple parties while providing an ‘untamperable’ source of financial truth.
The elimination of intermediaries can hold many benefits – particularly for small businesses and individuals – by eradicating significant handling costs so that they can reap their profits in full. Singapore-based Partior is currently exploring the use of blockchain and DLT to minimise post transaction exception handling and reconciliation activities in cross-border payments and securities.
In India, some foreign-based citizens have already opted to sending remittances via digital assets that often rely on varieties of DLT technology, such as blockchain.
Balancing DeFi opportunities and challenges with the right technology
The finance sector is especially ripe for disruption by DLT – given that trust, transparency and safeguarding against threats such as fraud and theft, are always under the spotlight and critical to continued smooth operations.
To unlock the full benefits of DeFi, having a reliable digital foundation is essential. There is a critical need to ensure that the distributed nature of this new technology does not introduce security, accuracy or reliability risks, or unavailability or delayed settlement times. Settlement flows – such as Fx, fund transfers and other financial exchanges – are taking place at extremely high volumes on a round-the-clock basis, and time is of the essence. In addition, certain tasks must also be completed ‘off ledger’, such as financial due diligence and data and currency formatting, before suitable information can be moved onto the distributed ledger.
However, DLT is designed to be ‘flow cautious’, due to its distributed nature and to ensure security through cryptography, often at the expense of speed. This is in stark contrast to the fast-paced financial sector, where ensuring speed – regardless of the volume of events taking place – is critical.
Clearly, organisations seeking to tap the benefits of DeFi must be able to bridge the gap between the distributed ledger and their own in-house systems. They need to develop a solution that carefully balances the event-driven nature of financial services, with the opportunities and benefits brought by the slower, more distributed nature of DLT.
What is the ‘glue’ that brings these two pieces together? Enter the event mesh and event broking.
On-premise meets decentralised: The event-driven value proposition
To make DeFi a reality, organisations must be able to interface their core systems with a distributed ledger.
Event brokers can provide the necessary interface between on- and off-ledger processes, acting as the ‘backbone’ of the organisation’s operations by effectively sharing trades between the necessary processes and applications. The usefulness of this approach can be enhanced by introducing an abstraction platform, such as an event mesh. An event mesh can accelerate interfacing and exchange through abstraction and orchestration to deliver a truly effective interface between core systems and a distributed ledger.
Event-driven architecture on the march
The demand for event-driven solutions is clear. A recent major study of C-Suite and IT architecture professionals found that 81% of organisations in APAC believe incorporating real-time data and event-driven architecture (EDA) into their operations can improve business processes. The opportunities – and challenges – presented by DeFi are a case in point, especially since the primary headache for organisations looking to embrace decentralised models is the balancing act required between legacy in-house systems and complex, distributed workflows, without compromising on speed or scale. This can be circumvented by using an event mesh to eliminate the friction between these two positions so that DeFi success is within reach.
Yet the technology alone is no ‘silver bullet’ – without a fit-for-purpose, event-driven framework, harnessing an event mesh and event broking, institutions will struggle to realise its full potential. Careful evaluation of feasible DLT use cases is equally vital to identify how an event mesh can best tie core systems together with distributed ledger technology.
Related article: DeFi platforms: the latest front in cryptocurrency’s hacking problem
By Sumeet Puri, Chief Technology Solutions Officer, Solace