We live in a world where global interconnectedness is increasing. With the explosion in popularity of online services, it has now become an absolute necessity that all areas of the Internet be easily accessible. Finance is no exception to this trend.
Gone are the days when only a privileged few had access to financial services like trading and investing. In just a decade, the financial space has transformed into a highly inclusive ecosystem where users can manage investments at the touch of a button.
This growing accessibility has been complemented by the massive growth of cryptocurrencies in recent years. A combination of these factors has led to a paradigm shift in the financial world. At the forefront of this shift is the cutting-edge service called DeFi.
What is DeFi?
DeFi, short for Decentralized Finance, is a branch of financial services where the flow of money is not controlled by a central authority. It offers an alternative to traditional financial institutions, where power is centralized with a select few.
To achieve “decentralization” of power, DeFi runs on an innovative infrastructure using blockchain technology and “smart contracts” (programs that automate the execution of transactions). All processes are handled purely via code. This eliminates the need for middlemen and brings game-changing features to the financial world.
Wealth managers and crypto hedge fund managers can leverage these features of DeFi for a whole new active wealth management experience.
The first radical feature of decentralized finance is that it is “permissionless” and “borderless.” “Permissionless” simply means you don’t need anyone’s approval before using DeFi, and “borderless” means you can access it from any part of the world. Thus, DeFi has absolutely no barrier to entry – all you need is a connection to the internet.
This creates an environment that encourages thousands of new investors to enter and explore the markets. Wealth or fund managers benefit the most from such a situation – they gain access to a large number of potential clients that they could not have met via TradFi (traditional finance).
The second aspect of DeFi is that it is completely transparent by nature. Once a transaction is processed on the blockchain, it becomes immediately visible to the public. For fund managers, this means that their past performance can be checked directly on the blockchain by anyone and at any time. For investors, this means complete protection from false information and secret activities involving their money.
Not only do these investors get track records of the money managers, but they also get full control over their own investments. DeFi is “non-custodial” – investors retain full custody of their assets and can exit funds whenever they want. Fund managers are only allowed to manage the funds – they cannot withdraw investors’ money for themselves.
Finally, the third unique facet of DeFi is that it is “composable”. Technically, composability is a programming feature that allows the individual components of a system to be put together in many different combinations. This allows all parts of the DeFi ecosystem to work together.
Thus, different components of DeFi such as decentralized exchanges (DEXs), credit protocols, and futures markets can be easily integrated with each other, creating new forms of financial services that were never thought possible. Additionally, the open-source nature of crypto and DeFi ensures that these financial services are constantly updated and improved.
But it’s not just innovation that offers “composability” — new DeFi integrations can also be very profitable for active wealth managers. Fund managers can combine different elements of the DeFi ecosystem to create extremely lucrative strategies and generate huge returns for their investors.
It is the possibility of such colossal returns that draws many people to the DeFi space. However, it is important to mention that decentralized finance is still in its infancy. The experimental nature of this field exposes it to several major risks, such as B. Hacking, smart contract vulnerabilities, front running and governance exploits.
But despite the above risks, the exciting nature of DeFi continues to attract both new and experienced players alike. By simply entering the lucrative crypto asset market, DeFi has brought an exponential number of people into the financial space. In the last two years alone, the number of DeFi users has grown from around 91,000 to almost 5 million.
DeFi has clearly taken the financial world by storm – it is the most accessible, transparent and dynamic alternative to traditional finance today. And while DeFi’s long-term prospects are yet to be seen, its game-changing properties clearly point to the wealth management of the future.
The author is a co-founder of DeFiVerse.
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