This is a guest post by Duy Pham (@duyyudus), member of P-Rep candidate team ICONVIET.
The caveat of existing financial systems
Despite high quality and extremely sophisticated financial products, existing financial systems are hard to access, especially in developing countries. It is also not transparent, leading to asymmetric information problems for participants. As a result, only the rich and well connected can benefit at the expense of others. In general, accessibility and transparency are the most notorious issues in the finance sector.
In case you didn’t know yet, the financial crisis of 2008 was deeply rooted in the opaque nature of Collateralized Debt Obligation (CDO) products at the time. We need big change, bringing more accessible and transparent finance, now more than ever. But this is difficult because the finance industry has been controlled by huge institutions for a long time. What can we do now?
The rise of blockchain technology
With the rise of blockchain technology and cryptocurrency, especially with leading smart contract platforms like Ethereum, a new wave of applications and experiments have been enabled, which couldn’t have been achieved before. In short, blockchain technology allows people to transfer data and value in a peer-to-peer manner, without the need for any centralized middlemen. Additionally, smart contracts have also paved the way for autonomous programs that cannot be shutdown by anyone. So many possibilities have opened up due to these achievements.
The seeds of DeFi
However, people are struggling to find meaningful applications for blockchain. It turns out that not every problem in real life can be solved efficiently with this new technology. In fact, industries that do not emphasize a decentralized nature will not need blockchain at all.
However, and fortunately, finance is one of the most well suited industries to take advantage of blockchain. Since late 2018, we have seen the Decentralized Finance (DeFi) movement spreading like wildfire. Starting from an open network of financial-related projects on Ethereum, the members of this initiative are all open source projects working together to build foundational protocols for tomorrow’s finance.
The core principles of this new finance system are:
- Interoperability and open source
- Financial transparency
An open finance future looks very bright — if it can overcome the challenges.
What are the challenges?
Well, a lot.
- In this nascent stage, there are tons of things that need to be built. Given the decentralized nature of blockchain — which is entirely unprecedented — we must build the infrastructure from the ground up. It will require a lot of collaborative effort between many people and teams. Interoperability is a must for open finance to work.
- Building the road alone is not enough. If there are no vehicles to drive on that road, it would be useless. In this case, the ‘vehicles’ are a metaphor for high quality end-user products built on open finance infrastructure.
- Finally, the vehicle cannot drive itself. We need people to drive it on the new road. These are the users. Therefore, spreading awareness and educating society about new finance is also extremely important. A mass movement cannot start without powerful public support.
Huge opportunity in developing markets/countries
For any evolutionary idea to bring radical change, there is always strong resistance from pre-established powerful entities. Developed countries with huge traditional financial institutions are an obvious deterrent to change. It would thus make more sense to evangelize new narratives and experiment in other places. Developing countries would be a good fit since their finance sector is not well-structured yet, leaving a lot of room for improvement and experimenting with new ideas.
ICON’s security token baby steps
At the moment, DeFi activities mostly revolve around crypto-related products. That is enough for early beginnings, but the real potential is hidden in the tokenization of assets in other industries. Starting with finance, tokenized-security is one way to go. And thus the STO was born (Security Token Offering).
STOs are the perfect combination of blockchain and traditional finance, combining both the efficiency of blockchain with regulations that protect investors.
At the time of this writing, ICON has been drafting its security token standard IRC-16. After being audited, we will have an official IRC-16 running on ICON’s public chain. It will likely arrive in the near future. Interoperability is also a core strength of ICON, so I am confident that ICON is well-prepared for decentralized finance.
What about ICONVIET and Vietnam as a potential market ?
Sure, we do not want to miss this opportunity, given that Vietnam is still a developing country. By the time we achieve ICONSENSUS and transition to a fully decentralized network, hopefully IRC-16 standards will be ready on the public chain, allowing us to start exploring the very first use cases that take advantage of STO and tokenized assets in general.
Local markets would be a good start. There are a lot of things in Vietnam that could bring greater benefits if they were tokenized, such as domestic stock exchanges, secondary markets, even video game figure collection communities, etc.
The future looks very promising for DeFi and ICON. However most DeFi projects are now on Ethereum. I hope and believe that once decentralized, more open source contribution activity will kick-start the ICON ecosystem, making it become the next de-facto platform for open finance.