Why You Need To Care About Decentralized Finance (DeFi)

Everyone seems to be talking about cryptocurrency these days. However, generalizing the technology and its potential is difficult. On one hand, there’s Bitcoin, the first cryptocurrency, which gained popularity when a white paper was published in 2008. Bitcoin has developed fast as a digital store of value since then, topping $1 trillion in market capitalization and compelling banks, traditional financial institutions, and even crypto-skeptics to take it seriously. Smart contracts and Decentralized Finance are on the other end of the spectrum (DeFi). Smart contracts and DeFi are still in the early stages of development, years behind Bitcoin’s mass market adoption and acceptance. However, given their many use cases and potential to digitize, democratize, and transform global finance, both smart contracts and DeFi have the potential to be even more valuable.
But, even if you never intend to care about or own Bitcoin, why should you care about DeFi? Because it has the potential to alter the financial services industry’s future.
Consider how financial goods are now offered and serviced: When you go to a bank or lender, you must follow their rules and rates, which are often opaque. We are obligated to trust these financial institutions and their policies because they control the gates. In certain countries, trust is easy (and vital), but in others, with high rates of inflation, corruption, and monopolistic financial infrastructure, it is less clear. People typically lack access to a safe and reliable place to park their assets, borrow money, or even make long-term investments in these markets.
DeFi is a technology that allows financial services to operate in a fully open, borderless, publicly accessible, and transparent digital form – as digital smart contracts stored on a blockchain that is transparent and secure under a set of regulations.
The potential of such an open, distributed system is frequently overlooked. However, its utility has been demonstrated in other scenarios. Consider a time before the internet or Wikipedia, when studying a topic necessitated a trip to the library or the purchase of a 32-volume set of the Encyclopedia Britannica. Expensive and difficult-to-use tools that could suddenly become obsolete.
Wikipedia is now viewed over 3 billion times every month, and it is not only free, but it also provides more detailed and up-to-date material than a library. It is available to everyone with an internet connection anywhere in the world. Finally, it is nearly certain to be true because, if inaccurate information is posted, the community, guided by a transparent and consensus-based procedure, promptly examines and corrects it.
ADDITIONAL INFORMATION FOR YOU
The core concept is the same as a blockchain. Wikipedia is a basic example, but digitizing information has resulted in a tremendous diffusion of knowledge and collective intelligence far greater than any single centralized institution. By fully digitizing assets of value and decentralizing and automating interaction between these assets, DeFi protocols are developing the same open environment for financial services.
DeFi isn’t simply an idea; it’s a way of life. We’re still in the early stages, but there are hundreds of protocols in use with real-world value that can’t be overlooked. DeFi has a total market capitalization of $148 billion, and these protocols have held more than $90 billion in locked up assets in smart contracts this year. It’s up from $18 billion at the start of the year. These platforms have actual traction and worth, unlike other crypto currencies like Dogecoin, which have inflated market caps. DeFi is much more than a transitory trend at this scale.
The application scenarios are also extremely real. Today, there are decentralized protocols that allow you to transport money throughout the world, transfer currencies, make interest on deposits, borrow, and lend.
DeFi is built around a stable coin, which is essentially a tokenized digital dollar that has the same value as its underlying fiat (for example, a US dollar), allowing users the benefits of digital currency without the price volatility. Tether (USDT), USD Coin (USDC), and white label stable coins for large exchanges like Binance Coin (BUSD) or Huobi Coin (HUSD), which are both operated by Paxos, an Oak HC/FT portfolio business, are the most popular stable coins today. Any financial services, fintech, or payments organization in the future might give their consumers their own branded fiat-backed stable currency for tailored use cases.
At any time, these stable coins can be manufactured or redeemed for their underlying asset. They also provide a digital image of a dollar, which allows for easy transferability. They are effective in a variety of cross-border payment scenarios. Despite the fact that the US dollar note is now mostly digital, it is still controlled by the Federal Reserve and the corresponding banking network, limiting global access and transferability. For example, if you wanted to send $1 to another country today, you’d have to go through many corresponding banks to transfer the money and verify the sender and receiver at every step of the way, which may take up to three days and limit accessibility. The value of a $1 can be transmitted and held anywhere in the world with a stable coin, but the physical $1 remains in a single custodial bank account.
Many countries and areas have already begun to implement mass market adoption, with Southeast Asia acting as an excellent example. Tether, a USD stable coin, is accepted at 7-Eleven and is utilized in everyday P2P payments and transfers. In several instances, it has supplanted local currency. Stable coins have been discussed by a number of global payment and remittance companies as a way to facilitate global money flow.
You can also use a DeFi lending protocol like Compound or Aave to earn up to 8% on a stable coin guaranteed by the US dollar. In a high interest bank savings account, the same USD would earn you 50 basis points. You can also get a loan in USD without having to go through the process of being onboarded and approved by a bank.
Decentralized lending and cross-border payments are just the beginning, but DeFi’s greatest potential is to democratize access to finance in emerging nations by removing the barriers created by existing centralized financial institutions. DeFi also promises to allow anyone with an internet connection anywhere in the world to instantaneously access any global currency, earn interest on deposits, or obtain loans. Even obtaining access to a solid USD-backed currency is revolutionary in some emerging economies. DeFi will eventually create a digital exchange ecosystem in which money and value are moved in the background from point to point, just as information and data are now, and where use cases are not limited by infrastructure functionality.
There is still much to be done, particularly in terms of improving the user interface and regulatory frameworks. But don’t be surprised if, in the next five years, DeFi will be something we all deal with on a daily basis./nRead More