The crypto industry is growing at a rapid pace. Just between 2020 and February 2021 alone users have invested an estimated $20.5 billion in various decentralized finance protocols. Just the little statistics is enough to show you just how much influence Decentralized finance has on the current economy.
But, before we go any deeper…
What is DeFi, Really?
DeFi is a decentralized financial system that uses digital tokens to represent either existing assets like currency, commodities or even something completely new like a share in a company.
You can think of DeFi as an infrastructure layer for global finance powered by Ethereum and open source code. It enables you to combine the security provided by traditional institutions with the broad accessibility and increased censorship resistance of decentralized systems.
Decentralized finance is an open access system in which anyone can directly participate without requiring permission from a central authority.
This means that users do not have to go through any 3rd party to use, hold or transact with their digital assets, unlike traditional institutions such as banks where you have to go through a 3rd party (your bank) to access and transact in your own money.
Is DeFi Taking Over The Banking World?
It may be a bit too soon to tell, but the move towards decentralized finance is certainly picking up steam. While DeFi has been around for several years now, it hasn’t seen mainstream adoption (yet).
However, with the launch of platforms such as MakerDAO and Compound which make it much easier for people to access and use the DeFi system, there’s a huge increase in interest from both developers and users.
While it may take years for these products to mature and see mainstream adoption, I truly believe we’re going to see some amazing things being built in the decentralized finance space.
To see this happen, two conditions need to be satisfied: 1) better user interfaces for building more complicated financial products and 2) better access for new users. We’re already seeing some interesting developments in these areas, which are only going to make DeFi more accessible and easier to use.
P2P margin funding, for example, allows users to borrow money from peers to make investments that they otherwise wouldn’t be able to afford.
And not only does it allow people who may not have access to traditional finance (e.g. those living in a country with capital controls) to participate in the global financial system, it also allows those who can only invest a small amount to diversify their portfolio without going through a traditional broker.
So while DeFi has been around for several years and we’ve seen some interesting developments come out of it, I think 2021 has already been an exciting year for decentralized finance.
Why DeFi?
1. Low-interest loans
Without financial intermediaries on blockchain networks, interest rates are low. Regulations like those issued by the Securities and Exchange Commission (SEC) and Federal Reserve for brokerages or centralized institutions aren’t needed because there is no central authority to enforce them.
2. High Return on Investment (ROI)
DeFi gives users an incentive to participate in the financial system by allowing them to stake their digital assets. Staking involves lending or investing your digital assets into a proof-of-stake platform, which is typical of DeFi platforms. This is better than what you’d get in a bank.
3. Transparency
Blockchain technology is a trustworthy system for financial activities that users trust more than ever. Blockchain allows people to be in control of their digital assets and lets them see where they are stored or used. The transparent nature of blockchain makes DeFi an accountable finance platform, which builds user confidence across the board!
4. Environmental Sustainability
The production of paper money worldwide by traditional banks has led to the continual felling of trees, which increases greenhouse gases in our atmosphere. In America alone, over 40,000 tons of metal are used annually for making coins and that’s just a fraction!
