Will DeFi replace the mainstream appeal of crypto for financial service providers? – Tech Crunch
By Kieran Mital, Sr. Brand Strategist at Tavant
In 2009, cryptocurrencies upended the way society views our traditional financial system, and now it’s DeFi’s turn. As DeFi continues to make a name for itself among members of the general public, it is becoming one of the worst-kept secrets within the finance and technology-related communities.
DeFi, or decentralized finance, runs on the Ethereum blockchain, making it easier for people to adapt to the new DeFi ecosystem. In 2015, MakerDAO was the first DeFi project created on Ethereum code. DeFi is built on Ethereum for several reasons. On the one hand, the fact that all DeFi products speak Etherium allows these programs to interact and exchange information with each other in the most effective and efficient way. However, the more important reason is much more abstract – Ethereum allows complete financial freedom to its users. Since no one owns Ethereum or smart contracts, everyone can use DeFi, and no one can change the rules.
Thriving on the back of Ethereum, DeFi is likely to see financial dominance in this new ecosystem driven by open-source technology. Cryptography, smart contracts, and blockchain technology are all aspects of Crypto that allow DeFi to exist for global, pseudonymous, and fast-paced community use. DeFi offers functions and products similar to traditional financial services, but can offer much more in an open source ecosystem, including but not limited to sending and streaming money, access to currencies stables, borrowing funds with and without collateral, starting crypto savings, trading tokens, growing and managing your portfolios, funding your ideas, and getting insurance.
The future is very exciting for decentralized finance, especially given the impact of borrowing and lending on this new ecosystem. Borrowing money from decentralized providers can be done either peer-to-peer or through a different process where lenders provide liquidity to a pool from which borrowers can draw. Flash loans are a type of loan that is steadily gaining traction in DeFi. Although not yet universally available to everyone, flash loans are a great example of what could be possible in the near future. They could significantly improve the TradFi system since traditional financial institutions do not offer them, as well as increase price stability on cryptocurrency exchanges to strengthen the crypto economy.
Beyond borrowing and lending, there are many areas within DeFi that offer immense opportunity. One such interesting possibility is quadratic funding, which ensures that the projects with the potential to improve the lives of the most people will receive the most funding. Another DeFi application that is catching users’ attention is Compound (COMP), an autonomous algorithmic protocol that allows users to provision various crypto assets and start generating interest. COMP is similar to borrowing money against a valued security, where anyone can lock up assets and start earning while continuing to earn interest on their position. Then there is Aave (AAVE), where lenders can earn a return on their assets provided to the protocol and adjust according to the supply and demand of that market, making it ideal for institutional investors. and detail. Aave users can deposit funds into a liquidity pool that borrowers can tap into when taking out a loan. Decentralized exchanges (DEX) are an essential part of decentralized finance where crypto traders transact directly without an intermediary. The success and accessibility of the Ethereum blockchain has propelled Aave into one of the most popular decentralized lending systems available on the market.
Although DeFi presents many possibilities for the future of finance, people still have their concerns. The fluctuation in transaction rates which makes active trading more costly is a major concern as it has already proven to be a problem on the Ethereum blockchain. Likewise, high volatility can occur depending on the decentralized applications used by an individual. Additionally, depending on the region, individuals need to keep their records for tax purposes, which is an issue for governments around the world trying to decide how they want to handle the income that individuals derive from this new DeFi space. More recently, fraud and security have come into question as $750 million was lost to crypto scams in 2021, as reported by The Washington Post. However, data from Dune Analytics shows that the number of DeFi users has grown throughout 2022 and currently stands at around 4.5 million unique wallet addresses. Additionally, India’s finance minister has proposed a 30% tax on revenue from digital assets, reflecting the impact of DeFi globally.
Although the future of DeFi is uncertain, it has continued to grow and attract value despite various issues, new protocols, and blockchain networks. The goal of DeFi is to create an open, trustless, permissionless financial market that improves on traditional finance. With all the help of Crypto and Ethereum, DeFi is here to stay. Are you ready?