DLT Technology Market

Multinational corporations have begun to leverage digital technologies that promise improved supply-chain efficiency and transparency, establishing new digital networks to facilitate trade and finance. Distributed Ledger Technologies (DLT), such as blockchain, play a pivotal role. According to a blockchain trade finance report by Bain & Company and HSBC16, the introduction of blockchain technology may reduce transactional friction associated with trade finance, potentially increasing global trade volumes by $1.1 trillion by 2026.

Cryptocurrency, blockchain, and the capabilities of the distributed ledger were first introduced to the market 13 years ago through the Bitcoin Whitepaper. The simplicity of Bitcoin's concept and the brevity of its foundational document are not commensurate with the complexity of the ecosystem, magnitude of market innovation, scale of new opportunities, and potential disruption that is now emerging. Although it is still early in the digitalisation of markets, the rate of crypto adoption already outpaces the internet adoption rate in the 1990s and foreshadows more change. 9 Blockchain is helping establish interoperability, trust, and transparency in the fragmented trade finance market. Smart contracts stored on the blockchain can act as a trust layer between buyers and sellers. Once a smart contract is created after validations and meeting consensus protocol criteria, it is added to the blockchain and visible to buyers, intermediaries, and sellers over its private or authorised blockchain network. Transactions are performed in real-time, thus streamlining trade flow.

The growth rate of the global blockchain technology market is 85.9%, with an estimated value of $1431.5 billion by 2030. The analysis conducted by crypto.com, an industry-leading research team, found that the global crypto population had increased by 178% in 2021, totalling almost 300 million crypto users. The number of crypto users is anticipated to break the one billion mark by the end of 2022. The major driving factors contributing to the high growth rate of the blockchain market include increasing venture capital funding and investment in blockchain technology, extensive use of blockchain solutions in banking and cybersecurity, high adoption of blockchain solutions for payment, smart contracts, and digital identities, and rising number of government initiatives.

Trade Finance Blockchain Implementation Challenges

Blockchain has the potential to become the new gold standard of business and trade. But first, all nations need to accept the technology and overcome the challenges facing blockchain implementation in trade finance.

Decentralised Finance (DeFi) Market

Full funding, validation, and disbursement processes have been built around decentralised finance (DeFi). DeFi is the "Uber moment" for the finance and insurance industry. It gained popularity in the summer of 2020 due to the growth of profits and tokens such as Compound and Sushiswap, which promised attractive profitability for traders.

DeFi commonly refers to the provision of financial products, services, arrangements and activities that use DLT to disintermediate and decentralise legacy ecosystems by eliminating the need for centralised institutions. It works based on decentralised programs called "dApps" or other programs called "protocols". Through the blockchain, DeFi allows conducting banking transactions without trust, bypassing traditional financial intermediaries such as banks and brokers.

Many of the financial products, services, arrangements, and activities in DeFi mirror and, in some cases, overlap with traditional securities and derivatives products, services, and activities. One of its preparatory characteristics is its peer-to-peer nature and resulting ability to create alternatives to traditional and centralised financial market infrastructures, products, or services. Some of the most common use cases for DeFi include decentralised exchanges (DEXs), borrowing-lending protocols, derivatives-synthetic asset protocols, insurance protocols, and prediction markets.

DeFi Lending

Alternative lending using blockchain technology offers a cheaper, more efficient, and more secure way of making personal loans available to a broader pool of consumers. With a cryptographically secure, decentralised registry of historical payments, consumers could apply for loans based on a global credit score.

But theres little room for third parties in DeFi lending, where smart contracts remove the need for a trusted intermediary. It enables actual peer-to-peer financing lenders and borrowers directly transact using cryptocurrency.

Lending and borrowing are essential parts of DeFi. It is the second-largest DeFi sector and constitutes almost 15% of total value locked in to all DeFi sectors as of June 2022.

In short, lenders receive interest in the form of their deposited token or a basket of other tokens, including the native token of the underlying protocol where assets are deposited. At the same time, borrowers can use these funds if they over-collateralise the amount they borrow in the form of other cryptocurrencies.

With enough collateral, any borrower can access liquidity for trading and more. Borrowing costs are determined continuously with an autonomous algorithm or protocol, and users can vote with their governance token on interest rates as part of a Decentralised Autonomous Organisation (DAO).

DeFi lending has a high potential to reshape traditional financial services, like payments, trading, investments, insurance, lending, and borrowing. DeFi lending, with its involvement of intriguing technology, has vast opportunities to revolutionise the global financial landscape.