How Developing Countries Could Benefit from DeFi
Decentralized Finance (DeFi) is a set of financial services on public blockchains, which can be utilized to solve critical issues in traditional finance. It eradicates the existence of a central bank or a third-party agency to authorize and accept financial transactions. DeFi is closely attached to the blockchain technology, which is a decentralized, immovable, public ledger, allowing any computer on a network to proceed with a copy of other transactions.
In the developing countries, banking, investments or financial services might be in less developed phases than in developed countries. It is claimed that those living in developing countries are found to have less access to physical banking whereas the asset assessment and trust issues decelerate the loans and transactions procedures.
However, with the availability of DeFi, it helps improve their living standard. DeFi could provide people with a variety of investment options through BTC, BNB, or any kind of stablecoins, generating new spaces for investors to both deposit their money and make passive earnings from the crypto world. This brings about a larger middle class, resulting in a blastoff in the development of the economy in those countries. In general, DeFi platforms enable users to deposit or make borrowings, exchange, or trade using blockchain technology and smart contracts without any intermediaries’ association. Once blockchain technology is applied effectively, future projects from developing countries could have a much bigger impact and coverage.
Existing secure flaws in current DeFi protocols
DeFi platforms run on the open-source code with algorithms setting rates in real-time based on supply and demand. It signifies the financial services future and is regarded as an efficient and cheaper approach for individuals to propose credits. However, with the promise of high rewards comes high risks.
Firstly, current platforms are susceptible to bugs in source code and hacks. In 2020, a DeFi lending protocol named bZx was attacked due to a faulty code. This led to the loss of $8 million. The attacker duplicated users’ assets and increased their balance of iTokens by the defective code, causing the hacker making 219,200 LINK tokens (equals to about $2.6 million); 4,503 ETH (equals to $1.6 million); 1,756,351 USDT (equals to $1.7 million); 1,412,048 USDC (equals to $1.4 million) and 667,989 DAI (equals to $680,000). The loss is $8.1 million in total. Fortunately, the users’ funds are hardly vulnerable because of the insurance fund coverage.
Secondly, such sites are vulnerable to token price manipulation. It is warned by critics that this type of technology could be the next overblown bubble of the crypto world. It is of the same kind as the initial coin offerings happening to inexpert investors, at a certain risk. In the other case, payment systems and traditional currencies can be disrupted by Bitcoin, which is also related to security breaches, wild price fluctuations and manipulation. It indicates that trading activity was likely to cause the first-time spike in the USD-BTC exchange rate in late 2013, when the market witnessed a considerable jump from approximately $150 to more than $1000 in 2 months.
Thirdly, the bad risk management control model is also a criterion that makes current platforms insecure. With the rapid development of P2P network lending, many risk issues have arisen, including legal risks, operational risks, credit risks, liquidity risks, etc. Therefore, risk management models must be improved and strengthened by platforms in order to focus on different types of risk.
Rikkei Finance — A platform with the core is a unique open lending system assuring users’ security
In order to solve the existing security issues emerging in the current platform, Rikkei Finance was born as an advancement with the vision to provide users with a safe and solid protocol that makes lending easy and secure. Rikkei Finance applies different methods to guarantee the security of the system.
Rikkei Finance operates the Multi-Kinked interest rate model. Basically, in the lending protocol, the borrow interest rate is calculated based on the utilization, which is the ratio between supply and demand. For instance, some lending platforms are now using the traditional linear borrow interest rate model as follows:
Applying this model, when the demand increases meaning more people borrow from the pool, the borrow interest rate will increase linearly. Obviously, nothing is going wrong with this linear model; however, users should be aware of these 2 main points so as to make sure their systems are safe:
The first remarked point is the stress point. It is when everyone is borrowing at the maximum capacity. If there is a big price correction (flash dip) in the market, everyone gets liquidated and you just simply go bankrupt. That’s why at this point (Ut), Rikkei Finance exponentially increases the borrowing rate.
The second noticed point should be the low point. This is when no one has the demand to borrow anything. At this point, Rikkei Finance offers users by lowering the borrowing rate without trading off the supply rate. In general, at the low point, users will get more benefits, and at the high point, it makes the protocol much safer, which means this model brings win-win situations for both parties. Therefore, instead of the traditional linear model, Rikkei Finance applies the Multi-Kinked interest rate model with the aim of tackling 2 key points that the traditional model does not address: one to make borrowing less cost-prohibitive during periods of low utilization, and another to boost liquidity providing incentives during periods of high utilization.
The second method Rikkei Finance uses is the transparent 5-phase asset selection process. In this process, assets will be evaluated and ranked in order based on multiple liquidity metrics by going through 5 phases: Data crawling, data filtering, liquidity measure and ranking, analysis and asset selection, and asset addition.
To begin with, data crawling is the stage when asset data is collected on a daily basis. Then, data will be filtered regarding market cap, volume, the ratio of circulated to total supply, and other factors. If the assets meet the minimum requirements for each criterion mentioned above, they will be switched to phase 3 for liquidity measurement and ranking, ensuring that only the most liquid assets are allocated to the pool, minimizing the risk of market manipulation, and thereby ensuring system sustainability. To achieve this, multiple metrics are used to evaluate, such as turnover ratio, current ratio, and Hui Heubel liquidity ratio. The top-ranking assets would then be further analyzed and entered into the voting section before being officially added to the pool.
The third approach for certifying users’ safety is the risk management model. RiFi system sustainability is guaranteed by controlling the collateral factor closely; setting limits for one-time withdrawal; freezing the supply/borrow when there is an attack; and employing complex price oracles. This allows the system to sustainably respond to any market situation.
From the failures of previous P2P platforms, Rikkei Finance has drawn on experience, thereby strengthening and creating new developments for a sustainable lending platform. With RiFi’s Multi-Kinked model interest rate, its 5-phase asset selection, a high-standard risk management model, and the source code audited by experienced developers, it is believed that Rikkei Finance is a potential project that supports optimizing the process of lending.
