DeFi or Decentralized Finance is one of the most significant advancements enabled by the combination of blockchain technology, smart contracts, and various data oracles. To state its impact, in the DeFi economy, users can access a similar financial services just the way they would do in a traditional finance one. But what’s new here is that there’s no need for the involvement of centralized intermediaries.
You must be wondering now, “How can this be possible, right?”. And the answer is pretty simple. They do so by using open-source protocols that run on censorship-resistant and decentralized networks. The applications built using the DeFi stack help in mitigating counterparty risk, provide global permissionless access, and interoperate with other applications to enable more advanced financial products.
To date, decentralized finance based applications have captured only 5% of the crypto space (as per the report published by CoinGecko). And this trend isn’t slowing down, in fact, as of June 2021, there is almost $93 billion worth of DeFi assets available in the crypto market. This is almost 20X growth from the net value of 4 billion just three years ago.
The primary reason for this uprise is the benefit DeFi offers to its customers. Some of the key attractions include:
- There’s zero need for anyone to go to the bank or any financial institution as anyone with an internet connection can avail the services of the DeFi world without needing any approval from anyone.
- With DeFi, you hold your money in a secure digital wallet instead of keeping it in a bank. Wherein, you only are promised a part of your earnings as an insured amount.
- It eliminates the intermediary fees charged by banks and other financial companies worldwide.
- An end-user can make a transfer within seconds and minutes.
Centralized Finance & The Larger Picture
In centralized finance, your money is held by organizations like the banks & other financial corporations whose bigger goal is to make money from your money. The financial system we follow currently is full of third parties who facilitate money movement between other parties, in which, each one charges fees for using their services.
Further, the centralized finance world is also subjected to a number of rules and regulations.
Risks of a Young Industry
Now that you’ve discovered that DeFi is interesting and exciting, it’s worthy to note that it’s also risky. While anyone can get involved with DeFi, it’s not advisable to invest heavily in the industry unless you can afford to loose your investment in case the tide turns. Why? Because the industry has suffered several high-profile hacks and attacks in 2019 and 2020, resulting in losses worth $35 Million dollars. A simple example you could take is of flash loans. In 2021, these were used to drain $900K of assets from the DeFi platform bZx in two separate attacks.
Scams like these usually take advantage of newcomers/newbies to the industry who haven’t done enough research and act quickly out of their excitement. These users are attracted to baits of higher returns and FOMO to be taking part in the next financial revolution.
What Is The Future Of DeFi?
The DeFi sector is currently raining with money, there are capitalists pouring a lot of funding in the system. Simply because the appeal of DeFi lies in the fact that there’s no central bank or third-party intervention. You own your assets completely. Thus, a DeFi solution (if successful) eliminates the need for trust in intermediaries and instead upholds security while encouraging open-source collaboration.
Some other concerns for DeFi include ensuring system stability, system maintenance, energy requirements, system upgrades, carbon footprint, and hardware failures. And on a high level, all of these are addressed by various efficient DeFi solutions across the globe.
In order for DeFi to succeed, the industry will need to adapt the self-police methodology, work with legislators to encourage the development of sensible laws that offer a good balance of freedom and consumer protection to everyone. Lastly, its also equally important to provide good educational resources to help newcomers navigate the financial landscape safely and effectively.