Defi became a sensation in the crypto space after Vitalik Buterin, Ethereum founder, and other developers sought a way to eliminate the middleman and bring an upgrade to the traditional financial system. Hence, the name ‘defi.‘ It’s an acronym for decentralized finance. It is a general term for projects and applications in the blockchain targeted at changing the traditional financial policy.
DeFi is a movement focused on creating an open-source, transparent, permissionless financial service that is accessible and available without anybody acting as the central authority.
Meanwhile, in the DeFi space, users are entirely in charge of their assets, and they interact with the ecosystem through decentralized applications and peer-to-peer.
It is safe to say that DeFi is the merger between blockchain technology and the traditional banking service.
The decentralized finance came with the promises that it would:
- Increase financial inclusion
- Bring greater transparency to the financial system
- Reduce the cost of transactions
- Hasten the pace of innovation
- Eliminate the middleman.
And true to its purpose, DeFi has been able to achieve all and has successfully brought a paradigm shift in the traditional financial system. With the world economic ecosystems battered by higher inflation rates, unemployment, rigidity in banking policies, extended lockdown, and artificially induced interest rates, a majority of the people have lost faith in the system and hence are searching for a better alternative.
Though decentralized finance offers solutions to these problems, many investors are still skeptical.They argue that the system is not entirely decentralized. So, you can’t trust it. Another drawback is its low liquidity and over-collateralization. Additionally, decentralized finance does not offer security like traditional banking. So, If anything goes wrong, there’s no way to get a refund. It makes it prone to scam. But considering the prospects defi has shown and the challenges it is experiencing, one might wonder if defi has what it takes to be the future of finance.
How Fast Is DeFi Growing?
Despite the fact that decentralized finance is still in its infancy, its growth is highly commendable. Since its adoption in 2018 by Ethereum, DeFi transactions have recorded exponential growth. It currently records up to 1.2 million transactions per day. Most of these transactions are from Uniswap and its lending and borrowing protocols.
Three years down the line, it’s still a huge success. From the statistics provided by MejoresApuestas, in 2021, DeFi’s market cap rose by 335%, which places its market cap at $85 billion.
According to Bloomberg, loans on digital currency platforms rose from 14.9% last week to $50.7 billion, as indicated by Defi Pulse. Cryptographic money trade exchanges on Defi networks climbed up by 8.6%. The number of Bitcoins utilized in decentralized finance also rose by 8%from 194,30 to 209,575. The number of Ether used rose significantly by 3.5%. Most of the defi protocols are built on the Ethereum network, which regulates the prices and amount we can deposit. From its exponential growth, there is a possibility that it might reach $100 billion by the end of this year.
The Future Of DeFi
Decentralized finance seeks to revolutionize the banking industry by using blockchain technology. If we can implement it, the banking system will improve significantly. It will improve;
- Payment system
Users can lock their funds in their smart contracts through Compound, Yearn, Aave, and Curve apps. It is possible to borrow, lend or hold to accrue value.
Now, APY ranges from 5% to 50% annually, depending on your underlying assets. The interest rate brings fear to the traditional finance system as they can get such turnover.
It boasts $30bn in its ecosystem, which places it among the fastest-growing segment in the blockchains’ ecosystem. Users get the maximum value for their money as it eliminates the middleman. Decentralized finance is the bailout to every developing country, and no country is an exception. It is a powerful tool that helps increase the banked and then unbanked financial inclusion.
The financial system has been down since Covid; it’s on the brink of default resulting from its debt. As a result, most of the population is seeking to access banks for rescue.
So, with the declining trust in the traditional banking system, the young population is seeking a digital solution, and Defi is likely the best alternative.
Now, let’s see how Defi could be of crucial help to the economies of nations
- Easy and fast loans
One of the vital aspects of the economy is giving out loans, as it is essential for businesses and corporations to grow. Banks give loans, but the only setback is that they prefer making money from transfer charges and deducting substantial amounts from their clients than providing loans.
But with Defi, loans are easily applied for and received, which in turn helps boost the Nation’s economy.
- It would provide increased transactions.
When Defi is adopted, the number of transactions that Mobile can do will double. Citizens would do mobile banking with comfort and ease. The speed of transaction is vital for the growth of small and medium scale enterprises which also helps grow the economy.
Asides, finance defi is focused on improving the quality of life. With the use of tokens, it finances capital projects, research on climate and food.
Now, cryptocurrency has a variety of uses, of which bitcoin is the most popular. It has grown and is currently the most stable coin owing to its supply cap of 21million individuals. Investors see Bitcoin as a haven against inflation and capable of giving huge turnover if held for longer.
But the truth is that cryptocurrency is broader than just Bitcoin and Defi is the game changer to nations’ economies. Many investors have noticed it and have started investing in it.
Furthermore, the Bank of America said, “Decentralized finance (Defi) is more disruptive than bitcoin. As of July 20, 2021, Defi had a market cap of $80 billion, which is still rising. Its growth and support can be seen in its ever-increasing value, locked in Defi’s World.