The global market for decentralized finance (DeFi) platforms is expected to reach $507.92 billion by 2028, growing at a 43.8% CAGR. What does this number signify? Is decentralized finance waiting for an opportunity to outperform the traditional finance system?
Let us understand it all through the below blog:
What is DeFi all about?
Decentralized finance is an upcoming financial technology based on safely distributed, blockchain-based ledgers like the ones used in cryptocurrency. The system helps remove the control that financial institutions such as banks have on financial products and services. It consists of dApps (decentralized applications), digital assets, smart contracts, and protocols, all built on the blockchain.
DeFi helps a customer save on the fee that banks or financial institutions charge for their services. As a result, a customer’s money is safer in a digital wallet than in a bank account. The transfer of funds takes place in milliseconds! All that is needed is a seamless internet connection.
What’s the need for DeFi when traditional financial systems are already well in place?
According to reports, even now a whopping 1.7 billion adults worldwide do not have a bank account. The “permissionless” DeFi technologies imply that everyone can now open an account without any hassles. You can lend, borrow, trade, or do anything else using your account, irrespective of your location or need. Let us understand how it works.
Consider a hypothetical situation where a US citizen needs to borrow US$10,000. The person would either use the money in their bank account or a few assets as collateral. After a review of finances by a bank employee, the lender shares an interest rate for loan repayment. Now the bank sanctions the loan, collects periodic interest, or EMIs, and has the authority to confiscate the collateral if the loan is unpaid. The power rests with the bank. It controls and regulates the flow of money at every step. The same holds true for asset management, insurance, or any other financial service anywhere in the world.
DeFi turns the tables in favor of customers by recreating the financial system using decentralized software applications that do not require a customer’s funds. If a DeFi customer needs a loan, they can simply put cryptocurrency up as collateral. A “smart contract” gets created that helps that customer get money from other customers who have collected a pool of funds. You do not need to visit a bank or seek the help of any intermediary and will completely avoid the procedural work associated with loan processing!
What are the benefits that DeFi apps bring to the table?
Conventionally, a brick-and-mortar bank or even its digital arm is more administratively burdensome and expensive as compared to a DeFi platform. Transactions are time-consuming and often cumbersome due to multiple approvals. DeFi settles many such issues. Below are its benefits:
No permissions needed
Defi welcomes people to its financial system irrespective of their culture, nationality, pay package, or location. All a user needs is internet access via any device. As per the World Bank’s estimate, 20% of the world’s total population did not have access to banking services as of 2018. The number can partially be attributed to “know-your-customer” (KYC). However, a few stages of DeFi permit customers to work without KYC as well.
Decentralization of accounts helps developers customize interfaces, integrate third-party applications, and expand on top of current protocols. This kind of adaptability helps build new, decentralized applications through consolidation of other DeFi products.
DeFi encourages accessibility and openness. As DeFi protocols are blockchain-based and available to customers on a public ledger, all the information is available for use by everyone. Although anyone can view transactions, the accounts of customers carry only numerical addresses. This makes them partially anonymous. Users can access the source codes of many DeFi products because they are open source.
Control lies with the user
A DeFi user is in charge of his or her own finances and funds. Although you store assets on the DeFi platform, you can utilize them according to your own requirements. Unlike the traditional banking process, you do not need to confide in a human intermediary for an investment or loan; a smart agreement takes care of it.
Opportunity to innovate
Since DeFi is an open-source platform, there are a lot of ways to come up with new products and services for DeFi. So, you can try out new ways to solve financial problems by putting them together in different ways.
What does the future of DeFi look like?
The idea to decentralize finance was born somewhere around 2017. This was a few years after the Ethereum blockchain was launched. The DeFi space has attracted the attention of key people across industries, such as investors, opinion leaders, and influencers. At present, DeFi is evolving rapidly and giving a new shape to the financial world.
Developers continue to experiment with new business models, combine DeFi protocols, and spearhead the development of new services. They are also innovating to develop mechanisms for managing risks efficiently. However, it is still an ongoing process. Services are becoming more decentralized in terms of management and governance as technologies continue to mature. In addition, the development of new tools will help DeFi customers make convenient use of the services.
With the emergence of trends like Metaverse and the intersection of Artificial Intelligence (AI) and Non-fungible Token (NFTs), we can look forward to a future where a user can easily move between different DeFi platforms. Long story short, the success or failure of DeFi depends on its ability to envision and fulfill the expectations future customers have from open yet trustworthy financial services.