What is decentralized finance (DeFi)
Decentralized financing (known as DeFi), in fact, includes a completely new monetary system, which is built on open block chains. Most people perceive Bitcoin and Ethereum as cryptocurrencies, but in reality they are huge open source networks. They allow anyone to create applications that carry out financial activities without the participation of centralized institutions. DeFi focuses on decentralized applications, also called DApps. These plug-and-play tools allow anyone with a smartphone to access financial services at a lower cost.
How to apply decentralized financing
Experts say that DeFi has the potential to change the lives of people without access to banking services. And for everyone else, the use of the new economy will be a simple and qualitatively better step into the world of high technology. Let’s take a look at the money transfer market through which foreign workers send billions of dollars annually to their loved ones. The interest for these operations is often huge and eats up their modest income. DeFi services can reduce these costs by more than 50%. This not only encourages the employee to earn more and be more productive, but also helps to support small business and the economy in another part of the world. Loans are another pain point that can be resolved thanks to DeFi. For many enterprises it is almost impossible to borrow money, often because they do not have a credit history in a banking institution. DeFi platforms directly connect borrowers and lenders, eliminate credit checks and provide the ability to secure digital assets. Other forms of decentralized financing include stable coins, a type of digital currency that protects consumers from the volatility of a cryptocurrency tied to another asset, such as dollars or gold. Tokenization means that real assets, such as art objects, property and goods, can be owned and traded on the blockchain. While decentralized exchanges mean a lower risk of cyber attacks, which many centralized platforms cannot handle.
Why DeFi has become abruptly gaining momentum
Technology is becoming more accessible, therefore, a large part of the population has access to the tools necessary to benefit from DeFi. As of 2019, 57% of the world’s population currently use the Internet on a regular basis. Compare this number with 2013, when the percentage of users was only 35%. In addition to this, smartphones are starting to become much cheaper, which means that they have become more accessible to the poorest people on the planet. Indeed, a recent World Bank study shows that two-thirds of non-bank citizens currently own a mobile device. And it is with this technology that they begin to explore the DeFi platforms.
Here are some noteworthy DeFi projects:
- OmiseGo for payments through the Ethereum network.
- Raiden for low-cost payments through Ethereum.
- Dai, a stable coin managed by MakerDAO and other stable coins, including Tether, USDC, etc.
- Decentralized Exchange (DEX) for digital assets and other DEXs, including UniSwap, Kyber Network or Bancor.
- Polymath is an investment platform offering a security token.
- Civic, Bloom and other DeFi products serving KYC.
- Dharma, ETHLend and other products in lending.
What are the risks associated with DeFi
There are some problems that need to be solved for the distribution of DeFi. Despite the fact that this could change the lives of millions of people, DeFi solutions were not able to attract public attention. Acceptance in the crypto world was at least modest. According to a study published by the Cambridge Center for Alternative Finance back in December 2018, there are only 25 million verified cryptography users in the world. Compared to the 1.7 billion non-bank people we talked about earlier, it’s clear that a lot of work needs to be done. It’s also worth remembering that even if DeFi applications manage to invite hundreds of millions of people to their platforms, the public blockchain they rely on may not meet their requirements. Visa claims to be able to process over 24,000 transactions per second. Scalability issues are also a longstanding issue at Ethereum, co-founded by Vitalik Buterin. The company recently admitted that the blockchain is almost complete. Cryptocurrency volatility is another issue. Even though stable coins tried to fix this, the regulatory obstruction continues to grow. Facebook unveiled ambitious plans to launch a stable coin this year, but the social network met stiff resistance from US politicians, regulators and financial institutions. Lawmakers have expressed concern that this could undermine the US dollar and lead to turmoil in the global economy, while banks fear that it could create a “shadow banking” system.
Removing regulatory barriers is a vital step in helping decentralized finance flourish. However, a big drawback in reaching consensus is that there are many DeFi organizations that work independently to create a fragmented market. And exacerbating the problem, there are countless governments with conflicting attitudes towards cryptocurrencies and the blockchain as a whole. Some countries have completely banned digital currencies, for example, in India, they threaten to send to prison those involved in crypto operations for 10 years.
Establishing contacts between DeFi platforms, opening new partnerships and engaging in open dialogue with decision makers who can help this technology reach the masses is a fundamental necessity.