What is DeFi and (why) is it the future of finance?
In this article, we will discuss:
So, without much ado, let’s get started already.
What is DeFi
DeFi stands for “decentralized finance”.
Decentralized finance consists of financial services such as savings, lending, borrowing, payments, exchange, insurance, investing, etc, provided on the internet and powered by the blockchain and cryptocurrency technology.
Blockchain technology makes it possible for these financial services to be provided and enjoyed by anyone and everyone anywhere around the world without having to trust a third party (such as the bank) with your money, privacy, and security.
So, in essence, DeFi provides everyone with financial autonomy and this is only made possible through the blockchain technology.
All you need to access and enjoy DeFi services is a smartphone phone with internet and some common sense (pun intended).
Key Benefits of Decentralized Finance
What makes DeFi better, compared to the traditional financial system you are already used to?
- Absence of human interference and possible manipulation in the operation of the system. These services are managed by smart contracts that are based on publicly verifiable codes with rules that cannot be easily altered by anyone —not even the developers.
- No limitations or interruptions. DeFi services are easily and freely accessible to anyone and everyone anywhere around the world and at any time (24/7).
- Cheaper and faster. The cost of using DeFi products is cheaper and faster, compared to the traditional financial system.
- You maintain custody of your money, unlike the traditional financial system where the bank or other financial institutions maintain full custody and even shared ownership of your money. Thus you can guarantee the security of your funds, maintain and preserve your privacy as everything is under your control.
- Privacy preservation. Even though cryptocurrency transactions are publicly verifiable they’re (pseudonymous) not linked to the real-life identities of the parties involved. Thus effectively protecting and preserving your financial privacy. However, there are tools that can be used to easily deanonymize you, but that’s a topic for another day.
“When we can secure… a financial network by computer science rather than by accountants, regulators, investigators, police, and lawyers, we go from a system that is manual, local, and of inconsistent security to one that is automated, global, and much more secure.” – @NickSzabo4
Current Problems with Decentralized Finance
There’re always two sides to a coin.
In as much as DeFi holds a lot of promises and has brought some really brilliant innovations that are revolutionizing the financial system, there are certain grey areas that you must know about before using the various available DeFi products in the market, such as:
- Prone to hacks, technical failures, and security breaches. DeFi platforms are run by codes that could be prone to exploitable bugs. You can easily lose all of your money if any of these DeFi protocols (software) are hacked or suffer technical failures.
- Unregulated. Most projects in the DeFi space are unregulated or at best poorly regulated. More so, lack of regulation lives a lot of room for founders and developers to exhibit what would be easily described as unethical behaviors or even outright scam in traditional systems unabated.
- With authority and autonomy comes increased responsibility and risk. In DeFi, you alone are responsible for the security of your funds. There’s no government or central authority to protect you. As a result, if you fail to effectively protect yourself, you will likely end up a victim of ignorance, scam, and other vices that can lead to the loss of your money.
- Not insured. Most DeFi projects have no insurance coverage like the traditional financial institutions. As a result, if anything bad happens, the chances of getting your money out is close to zero.
- Scalability and user-friendliness. Most DeFi platforms still require a lot of upgrades in terms of capacity and user experience to be able to attract novice users and handle the necking breaking volume of transactions that comes with mass adoption.
- Steep learning curve. DeFi is new and developing at a very fast pace that there’s so much to learn and keep up with. The average Joe and even some experienced crypto users don’t understand how most DeFi projects and products work. A lot still needs to be done in terms of education and simplification of the system in order to onboard the masses.
A big challenge for DeFi is education — onboarding people to DeFi can be difficult, but new educational resources are coming out all the time which is great. Going forward though, education on not only how to use different decentralized applications but also security and risk is important. ~ Stani Kulechov (CEO of Aave).
DeFi is the Future of Finance
The DeFi sector is growing at an alarming rate.
As at the time of writing this line (October 9, 2020, 10:52 UTC) the total value locked (TVL) in the various DeFi protocols is over $10.6 billion USD according to DeFiPulse.
And DeFi projects account for nearly 4% of the entire cryptocurrency market capitalization with a total value of over $13.6 billion USD — and this is even after more than 50% price retracement in most DeFi coins and tokens.
To put things in perspective, at the beginning of this year (2020) TVL in DeFi protocols was just a little over $500 million USD.
So between January 2020 to October of the same year, the DeFi has grown by 2020% and this is just the beginning.
DeFi is disrupting the financial system and is a huge step forward for democratizing access to financial products such as lending, borrowing, insurance, exchange, payments, investing, etc.
More and more DeFi applications are being built every day, all of them contributing to shaping the future of finance as we know it.
With the influx of capital in the DeFi space, projects are building more applications for the next generation of financial networks. The DeFi mania we see in the market right now is therefore helping in our mission to transform the world of money ~ Jason Wu, (CEO of Definer.org).
More so, there has been noticeable institutional interest and participation in DeFi, cryptocurrency, and blockchain generally.
Several big organizations are either investing, developing, or integrating one DeFi product or the other as part of their overall investment strategy and portfolio.
Financial institutions are also adopting blockchain technology in streamlining the various aspects of their business towards more inclusive, cheaper, and faster access to more robust financial services if they aim to remain in business in the new world of finances.
Because the future of finance is DeFi and it does look very bright.
With the level of development going on, one does not need to be an oracle to predict that it will not be long before every single financial service available in the traditional financial system is made available in DeFi applications.
However, there’s a lot more work to be done in terms of security, regulation, user-friendliness, and scalability.
You will also enjoy reading: The Developing Story of the Future of Money
What do you think about DeFi? Please share your thoughts with us in the comments section below.