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The world is facing a pandemic and our global financial infrastructure has been tested. But even in the face of several groundbreaking events, decentralized finance (DeFi) was able to grow. During those dire times, DeFi’s blockchain-based technology proved a savior for many and revolutionized the financial sector.
In simple terms, DeFi is a blockchain-based technology that is an alternative form of funding. Unlike conventional financing, it does not depend on central financial intermediaries, which effectively reduces costs while increasing the privacy and security of a transaction. It does this by using the smart contracts function on blockchains, generally Ethereum.
As of July 2021, DeFi’s market cap is nearly $ 80 billion and is expected to continue to grow in the future. The visible growth and support of DeFi can also be seen in the ever increasing Total Value Locked (TVL) in the DeFi world.
After the collapse of global financial systems in 2008, governments and central banks committed to key economies. They decided never to let the banking system threaten our economic and social well-being again. Since the 2008 crisis caused by banks’ extreme risk appetite, the financial sector has played it safe by being less adventurous and rejecting any transformation that would require a change in the overall financial framework.
The global pandemic was yet another fact check for the banking sector as the socio-economic lives of many were destroyed. You must now recover sustainably and robustly from the catastrophic economic effects of Covid-19.
Related: What Is Holding DeFi Back (And How To Fix It)
The big reset
Amid the ongoing pandemic, the World Economic Forum (WEF) developed a program called “The Great Reset” in June 2020. The financial systems have realized that they need to change the world economy from its foundations. The idea is that society must recognize the economic problems caused by the Covid pandemic and anticipate other challenges that the world may face. Blockchain can help fund a great reset, and DeFi can lead that revolution.
DeFi is a blockchain-based ecosystem that puts the community first, providing financial services based on distributed networks that have no central authority. This means that no individual rules the organizations; rather, they are ruled by the parishioners.
Banks play an indispensable role in the current financial systems. They are the only big players and always in a position of power. DeFi is a community managed program.
Defi strives to build a fundamentally functional financial landscape made possible by blockchain technology. With the advent of blockchain technology, the banking system will benefit most from the following three aspects:
Relatives: Drawn into DeFi? Here are 3 important considerations
A new and secure digital world
One of the secondary effects of Covid is people getting used to online transactions and choosing the most convenient route for their banking and transactional needs. Financial institutions try to cut costs in every possible way; Moving your operations to digital platforms can effectively help you cut costs.
Long term, DeFi will stay and make some significant changes in the financial sector. Many activities are already taking place in the DeFi-related crypto room. For example, China is releasing its central bank digital currency (CBDC), the digital yuan. European countries are following the trend.
Early uses of DeFi
Even though DeFi is still in its infancy, DeFi has shown its potential in many ways. Financial banking services, alternative savings, and P2P lending platforms are just a few of the mainstream DeFi uses that have seen investors and enthusiasts raise billions of dollars in support of the technology.
While a blockchain-based decentralized system can usually process transactions faster and more securely, the price volatility associated with these DeFi tokens is an issue that has slowed mainstream adoption. That’s why stablecoins come into play. Stablecoins are digital coins that are pegged to a real currency such as the dollar or the yen.
Stablecoins also grow with Defi; Of the current top 10 cryptocurrencies, three are stablecoins with a combined market capitalization of around one trillion dollars. Stablecoins gives an ecosystem the transaction of cryptocurrencies with the stability of a Fiat.
DeFi apps also offer users the ability to keep their money outside of traditional institutions like banks and farm them to fuel pools of liquidity on the blockchain with dollars.
Another major application of these newly discovered blockchain-based technologies is in decentralized exchanges, which are designed to provide both the security and the speed that centralized exchanges cannot.
As mentioned earlier, DeFi is still in its infancy and so there are some challenges that the technology is facing that must be addressed for further adoption.
Some projects that are improperly created pose a constant security threat. There have been cases in the past where hackers got away with a defi-protocol exploit involving multi-million dollar cryptocurrencies. In many cases, the protocol itself also turns out to be a fraud, and therefore there is visible skepticism about DeFi.
DeFi’s potential is undeniably huge, and therefore it will undoubtedly be important for both potential users and current DeFi executives to address the security issue. Many developers are unable to meet the high demands of the users and therefore use third-party monitoring tools and in the future the demand for security services in this area will increase sharply. Concepts like smart contract insurance and stablecoins protect users from both volatility and cyber threats.
While every new technology brings its challenges, it will be exciting to see the innovative ways in which we will use blockchain to improve society and the entire financial system.
Related: How DeFi Will Reshape Financial Services