Our global financial system has been outdated for far too long. It serves billions of people and moves trillions of dollars every day, yet it is still plagued by issues. There are numerous fees and added costs, delays, redundant paperwork, all of which is prone to fraud.
So, what is the solution to these issues? Decentralized Finance more commonly referred to as DeFi. DeFi has quickly gained popularity as one of the most disruptive blockchain technologies. With cryptocurrency reaching new heights and more individuals and companies adopting the technology, the use of DeFi services is becoming mainstream.
Before we look at how blockchain or DeFi is revolutionizing the finance sector, let’s learn more about DeFi.
Decentralized Finance: What is it? Why is it Better than Traditional Finance Systems?
When we talk about DeFi, we have to talk about Blockchain. Blockchain became quite popular as it was the technology powering Bitcoin. It is a decentralized public ledger with cryptographic encryption that can record any transaction.
DeFi aims to simplify financial processes, as a user can access DeFi services with just a smartphone and cryptocurrency wallet. The users will have the most, if not total control, over their own assets.
DeFi is better than traditional finance systems for the following reasons –
- Smart Contracts
- Transparency
- Accessible for Everyone
With the help of smart contracts, DeFi aims to do what traditional banks do, but without middlemen. A DeFi protocol will make use of these contracts to communicate with the users to help them transfer funds, lend, or even borrow. It eliminates the need for intermediaries and any additional costs for processing while removing the delay when transacting. This also leads to reduced errors and increased efficiency.
DeFi is much more reliable and transparent mainly due to its underlying technology. It executes all the rules with its code. Based on the action performed, you will be governed by certain rules until the contract expires.
With DeFi, even those who cannot avail basic financial services can now borrow or lend money with just a few clicks on their smartphone. Traditional banking has a specific range of regulations for those who can open an account and for those with bad credit scores, it is impossible to borrow money from banks.
DeFi Revolutionizing the Finance Sector
With DeFi transforming the finance sector, more Decentralized Exchanges, (DEXs), have started emerging. With the help of DEX, users can directly interact with the blockchain network for trading or any other financial service.
Generally, most DeFi projects are set up on the Ethereum blockchain. However, many new applications are being deployed on blockchains such as Solana & Cardano. Although setting up decentralized apps (DApps) or DeFi systems requires a steep learning curve, the low barrier of entry has attracted many SMEs and FinTech startups.
DeFi has a perfect use case in emerging economies, where inflation is at an all-time high and still on the rise, or an authoritarian regime is underway. Countries like Hong Kong and Nigeria, and many East Asian countries have shown increasing interest in DeFi in the past 12 months.
Ugochukwu Aronu, the founder of Xend Finance, a platform that supports the credit unions and cooperatives operating in Africa and beyond said “Nigeria’s devaluing currency and young population has sparked interest in DeFi.” He also added, “These are people who like to try out new things.”
According to World Population Review, the median age in Nigeria is 18.1, compared to 38.1 in the United States.
Xend Finance is working with credit unions and depositing their collective funds into stablecoins to protect them from devaluation. These assets are then lent onto different DeFi protocols that provide the best returns.
Western populations such as, the United States, Canada, and Europe are on top of the list with DeFi traffic. There has been a growth in institutional investors seeking exposure into the crypto world, especially via DeFi protocols. Most of the institutional transactions have been paid in Ethereum or an Ethereum equivalent traded on DeFi platforms.
One of the main reasons why Europe contributes to high crypto volume is due to its regulation. In most countries, crypto is not regulated and in some it is even banned. But the UK and EU have open banking regulations.
The EU investors are turning to DeFi to primarily take part in staking. Staking is a process that lends the users’ crypto to DeFi protocols for liquidity. These funds are then given to the borrowers and the lenders are paid interest; this is particularly useful for those who HODL their crypto. The investors generally stake in DeFi protocols with the help of stable coins.
Apart from Nigeria and the UK and the EU, there are numerous countries all over the globe that are looking to adopt DeFi services. To support all these requirements, various DEXs and decentralized autonomous organizations (DAOs) are in place.
Conclusion
Decentralization will be a huge step for our existing financial systems. With more investors indulging in the DeFi space, a decentralized economy is inevitable. Participating in such an economy at the moment may be risky, but as more people embrace DeFi, it will pave the way for robust DeFi applications, platforms, and services.
The technological, societal, and macro dynamics are major contributors for DeFi’s exponential rise over the last few years. DeFi, or blockchain, is said to be the financial system behind Web3, the next version of the World Wide Web, which has a greater focus on giving more power to the creators.
Another major push for DeFi might be government regulations that support them. This may bring in more investors and turn the public eye to a decentralized financial system.
DeFi has the potential to provide our society with a seamless financial experience no matter where you are in the world. Such an ecosystem eliminates various location, status, and wealth barriers and lets unbanked individuals access vital financial services.