What is decentralized finance (DeFi)?

What is decentralized finance (DeFi)?

Decentralized finance (known as DeFi) essentially involves a whole new monetary system that is built on open blockchains. Most people think of Bitcoin and Etherium as cryptocurrencies, but they are actually huge open-source networks. They allow anyone to create applications that carry out financial activities without the involvement 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 funding

Experts say that DeFi has the potential to change the lives of people without access to banking services. And for everyone else, using the new economy will be a simple and qualitatively better step into the world of high-tech.

Let's take a look at the remittance market through which foreign workers send billions of dollars to their loved ones each year. The interest on these transactions is often enormous and eats into their modest income. DeFi services can cut those costs by more than 50 percent. Not only does it encourage the worker to earn more and be more productive, but it also helps support small businesses and the economy in another part of the world.

Loans are another pain point that can be solved through DeFi. For many businesses, it is nearly impossible to borrow money, often because they have no credit history with a banking institution. DeFi platforms connect borrowers and lenders directly, eliminate credit checks and provide a way to secure digital assets.

Other forms of decentralized financing include stable coins, a type of digital currency that protects consumers from the volatility of cryptocurrency tied to another asset, such as dollars or gold. Tokenization means that real assets such as art, property and goods can be owned and traded on a blockchain. While decentralized exchanges mean reduced risk of cyberattacks, which many centralized platforms cannot handle.

Why DeFi started to gain momentum dramatically

Technology is becoming more accessible, hence a larger portion of the population has access to the tools necessary to benefit from DeFi.

As of 2019, 57% of the world's population currently uses the Internet on a regular basis. Compare that number to 2013, when the percentage of users was only 35%. On top of that, smartphones are starting to become significantly cheaper, meaning that they have become more accessible to the poorest people on the planet. Indeed, a recent World Bank study shows that two-thirds of unbanked citizens now own a mobile device. And it is with this technology that they are beginning to explore DeFi platforms.

Here are some noteworthy DeFi projects: 

  • OmiseGo for payments over the Ethereum network.
  • Raiden for low-cost payments over 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, an investment platform offering a security token.
  • Civic, Bloom and other DeFi products serving KYC.
  • Dharma, ETHLend and other products in lending.

What risks are associated with DeFi

There are some problems to be solved for the spread of DeFi. Despite the fact that it could change the lives of millions of people, DeFi's solutions have failed to attract public attention. Acceptance in the crypto world has been modest to say the least. According to a study published by the Cambridge Center for Alternative Finance back in December 2018, there are only 25 million verified crypto users worldwide. Compared to the 1.7 billion unbanked people we talked about earlier, it's clear there's a lot of work to be done.

It's also worth remembering that even if DeFi apps manage to invite hundreds of millions of people to their platforms, the public blockchain they rely on may not meet their requirements. Visa claims it can process more than 24,000 transactions per second. Scalability issues are also a long-standing problem at Ethereum, co-founded by Vitalik Buterin. The company recently admitted that the blockchain is nearly full.

Volatility in cryptocurrencies is another problem. Even though stable coins have tried to fix it, the regulatory hurdle continues to grow. Facebook unveiled ambitious plans to launch a stable coin this year, but the social network has met staunch resistance from U.S. policymakers, regulators, and financial institutions. Lawmakers have expressed concern that it could undermine the U.S. dollar and cause turmoil in the global economy, while banks fear it could create a system of "shadow banking."

Retrieved

Removing regulatory hurdles is a vital step in helping decentralized finance thrive. But the big flaw in reaching consensus is that there are multiple DeFi organizations that operate independently of each other, creating a fragmented market. And compounding the problem, there are countless governments with conflicting attitudes toward cryptocurrencies and blockchain in general. Some countries have banned digital currencies entirely, for example, India is threatening to send those who engage in crypto transactions to prison for 10 years.

Connecting across DeFi platforms, opening new partnerships, and engaging in an open dialogue with decision makers who can help this technology reach the masses is a fundamental necessity.