Crypto news has been dominating the markets for the better part of 2022. However, the expert outlook on the crypto market now is hovering on bleak, with it being largely stalled and a continuous fall in crypto prices across key financial markets. As the global investor community still debates the long-term benefits of cryptocurrency among its magnificent highs and massive lows, a silent revolution has been brooding in the background for the past few years.
Decentralized Finance, popularly referred to as DeFi, is supposedly the next big thing in the fintech space. According to experts, it is expected to garner tremendous adoption in the next 10 years.
What is DeFi?
Decentralized Finance is a blockchain-based application that includes decentralized exchanges, lending platforms, and digital asset-staking technology. The platform introduces bankless digitization of Wall Street minus the hefty fees and intermediaries. Moreover, transactions, including payment, settlement, and transfer of ownership processes, are almost instantaneous.
Most importantly, you can access DeFi round the clock, from any corner of the globe, if internet connectivity is available. It has been developed on blockchain technology and smart contracts.
Smart contracts are basically programs stored on the blockchain that can operate automatically if the predetermined conditions of the program are met. The Decentralized Finance ecosystem had already reached US$ 247.5 billion in total locked value or TVL by the end of 2021. TVL is currently the capital in use or secured in the decentralized ecosystem.
The amount is undoubtedly insignificant compared to the commodities, derivatives, and equities market. But, having said that, the growth rate of decentralized finance has been impressive at 13x since January 2021. Analysts attribute this spike to the effective and efficient nature of its platforms, which have delivered high returns to retail investors.
What are the Key Challenges for DeFi?
Several challenges have obstructed a full-fledged deployment of decentralized finance in the mainstream ecosystem. Here are a few crucial challenges:
The first major obstacle is scalability, as the technology cannot be implemented with a ‘one size fits all approach. It clearly limits the platform to a certain extent. Moreover, experts think that developing a sustainable decentralized ecosystem in the short to mid-term may possibly contain interoperable blockchains where it becomes imperative for these blockchains to find a foothold among various market segments.
Over the next three to five years, the ecosystem will be consumed by cross-chain protocols expected to define the ecosystem to create a multichain world.
Vague Regulatory Processes
Regulating a decentralized ecosystem is the next roadblock, as the SEC has several concerns about the lack of equal informational access around it. Again, the body has some control over specific segments, but it is mainly ambiguous and vague.
Technical and sophisticated investors who have a monopoly over the average user in their ability to extract and interpret complex data still dominate the space. It is believed that a precise and transparent regulatory framework will eventually emerge in the foreseeable future, driving consumer and institutional adoption of decentralized finance.
Standard Tool Integrations
The absence of a counterparty risk assessment tool and the lack of integration of a standardized application layer for trade execution and enterprise-grade data and analytics poses a hurdle in its institutional adoption.
How Can DeFi Define the Future of Finance?
Global interest in a decentralized ecosystem has increased despite the crypto boom and will probably continue. It offers attractive returns to token holders compared to cryptocurrencies. The experts believe there will be an inclusion of cryptocurrency and standardized DeFi products across more neo-banks and fintech companies as their goal is to expand their product offerings.
Additionally, analysts expect DeFi to act as a bridging platform between the physical and the digital world, posing as an alternative asset class that is more liquid and interchangeable. The beauty of such an ecosystem is that it is not designed to replace the current financial infrastructure but a system that can co-exist with traditional financial institutions. It essentially means constant innovation that will help a decentralized system align with conventional financial products to retain its competitive edge in the market.
Will DeFi See Higher Global Adoption in the Next Decade?
Decentralized finance is gaining acceptance as a financial model with more than a billion people living on a daily wage of US$ 1.90 or less. It is the critical driver in the digital revolution as it bridges the gaps between decentralized finance infrastructure, assets, and the underbanked, which can potentially accelerate institutional adoption. In a nutshell, it can transform how people usually interact with assets of different sizes and banking in general.
This shift in banking attitude is primarily due to people being more open to the Internet, enabling asset tokenization of all sizes. But, most importantly, the move is aligned with the financial model’s overall goals of lowering costs and increasing financial accessibility for all.
Will DeFi become the next big revolution in FinTech? We will have to wait and see how a decentralized model will help the Fintech companies function efficiently.
1. Which is the dominant network of Decentralized Finance?
Currently, from a general-purpose blockchain, the dominant network is Ethereum which has fostered a robust community of users, developers, nodes, tools, and applications. Terra is another blockchain focussing on primary use cases such as algorithmic stablecoins.
2. What is the difference between DeFi and crypto?
Decentralized finance generally covers a range of financial services, whereas Bitcoin is only a decentralized cryptocurrency. For example, a decentralized system enables lending, borrowing, and trade, including cryptocurrencies. On the other hand, Bitcoin is a store of value like flat currency.
3. Is investing in Decentralized Finance safe?
The decentralized platform comprises smart contracts, a self-executing agreement that builds the foundation for such projects. Unfortunately, this can make the platform vulnerable to bugs. Moreover, investors risk becoming targets of a wide range of crypto crimes like phishing, rug pulls, and perhaps even honeypot scams.