This technology, known as decentralised finance (DeFi), has been making waves in the financial sector and is rapidly becoming a major player in the global economy.
What Is Decentralized Finance (DeFi)?
DeFi is a form of finance that is not controlled by any one central authority and instead relies on a public ledger (blockchain) to store and validate transactions. This means that it is not only secure and transparent but also highly accessible as anyone can access the ledger and view the transactions.
DeFi applications are built on top of the blockchain, and allow users to interact with financial services without relying on a third party. This makes it possible for users to access services such as lending, borrowing, trading, and investing, all without the need for a bank or other financial institution.
The Implications Of DeFi
The implications of DeFi are far-reaching, and it could potentially have a major impact on the way the global economy works. Firstly, it could lead to a more democratic and transparent financial system, as all transactions are recorded and publicly verifiable. This could reduce the power of large financial institutions and enable more people to access financial services.
Furthermore, DeFi could also enable more efficient and cost-effective financial transactions, as users will be able to access services without having to pay large transaction fees to banks or other third parties. This could lead to a more efficient and cost-effective global economy and potentially lead to a reduction in global poverty.
Finally, DeFi could also enable the development of new financial instruments and services that are not currently possible under traditional banking systems. Examples of this include smart contracts, which are self-executing contracts that allow for automated and secure transactions without the need for a third party.
DeFi in 2023
2023 marks a major milestone in the world of decentralized finance (DeFi). This technology has completely revolutionized the way finance is conducted and has created a whole new world of possibilities.
The primary benefit of DeFi is its ability to provide financial access to anyone, regardless of their location or financial background. By using decentralized protocols and smart contracts, DeFi allows users to access loans, insurance, savings, investments, and other financial services without relying on a central authority. This has not only opened the door to financial inclusion, but has also allowed for greater transparency, security, and efficiency in the financial industry.
DeFi also allows users to access a wide range of financial products and services without the need for a middleman. This has enabled users to save money by cutting out the middleman and accessing assets and services at a lower cost. Finally, DeFi has enabled the development of a new breed of financial applications and services. By providing users with access to a wide range of financial assets and services, DeFi has enabled developers to create innovative financial applications that are tailored to the needs of their users. Read more about trading platforms and the modern DeFi Impacts in 2023.
In Summary
Overall, the implications of DeFi for the upcoming years could be significant, and it is likely to be a major player in the global economy shortly. With its potential to revolutionise the way we interact with finance and the global economy, it is an exciting technology to keep an eye on.
All in all, DeFi has revolutionized the way finance is conducted and has opened the door to a world of possibilities. By 2023, DeFi has become an integral part of the global economy and has made financial access easier and more secure than ever before.
Decentralised finance (DeFi) is booming, with the total value locked – the overall value of assets deposited in transactions – having risen from $700 million in December 2019 to over $200 billion at the beginning of 2022, equivalent to Greece’s 2017 GDP.
Having spent 15-plus years in the FinTech sector and as CEO of AQRU, a company that offers secure platforms for users to easily access the decentralised markets, I’ve experienced both sides of the coin first-hand. This has allowed me to identify three main factors fuelling the growth of DeFi: accessibility, ease of use and yields. These drivers stem directly from the way DeFi is built which is why, before deep diving into each one of them, we must take a step back to understand the basics of DeFi.
The building blocks of DeFi
DeFi is the use of the blockchain, the technology upon which Bitcoin and Ethereum are based, to create an entire financial ecosystem that doesn’t rely on a central authority, such as a bank, to validate transactions. Instead, all activity is recorded in ledgers stored across millions of computers, each capable of verifying every transaction to ensure it matches the records.
However, there is not much point in a digital currency if there is nowhere to spend it. DeFi makes Bitcoin, Ether, stablecoins and other cryptocurrencies worth having as it enables users to gain interest from lending cryptocurrency (also known as yield farming), buy insurance, and save and send money anywhere in the world – if it can be done in traditional finance, it can be done in DeFi. Now that we’ve covered the building blocks of DeFi, we can move to the three factors driving the growth of the sector.
A system accessible to all
One of the initial goals of crypto and DeFi is to promote financial inclusion by ensuring the 1.7 billion people worldwide who don’t have a bank account and nearly half the world’s population without an active bank account can access the same benefits – paying bills, accessing insurance and creating a pension pot – as those participating in traditional finance.
To do so, blockchain technology has been designed in such a way that it is accessible to anyone with a smartphone. With 91% of people worldwide owning a smartphone, this design has opened the door to thousands of people considered ‘unbanked’. And in countries such as Venezuela where exchanging currencies is difficult, it has also allowed people to protect their savings from inflation by exchanging their fiat for crypto.
As simple as tapping on a smartphone
As well as opening the door to millions of ‘unbanked’ people, DeFi has attracted a lot of interest because of how easy it is to use. Crypto and DeFi first started as an intimidating sector, the exclusive domain of the tech-savvy. However, things have changed – we’re now seeing many platforms, such as AQRU, that allow investors to easily exchange their fiat into cryptocurrency and access the high yields available in DeFi.
While these platforms initially focused on retail investors, new solutions are also being designed to allow institutional investors to easily access the decentralised market, maintain close oversight over their investments, and remain compliant with any relevant regulatory and security requirements.
Sky-high returns
For investors, one of the most appealing parts of decentralised finance is the yields. In DeFi there are no intermediaries between transactions, all of them take place peer-to-peer. By eliminating all the steps in-between, it means the lender can take almost all of the yield.
To give an example, let’s compare it to a bank. A savings account with a bank returns 0.5% per year if people are lucky. The bank may well have made 10% on loaning customers’ money, but by the time they have covered their costs and taken their share, there’s not much left for the user. DeFi’s main cost is the upkeep of the website, which has attracted users looking to maximise their returns.
The road ahead
The building blocks of DeFi are what has made the sector so popular. However, for DeFi to become a true competitor to traditional finance, it must reassure customers that their money is just as safe in DeFi as it is in a bank.
Over the last few years, there have been some high-profile incidents where online wallets, when external companies manage customers’ cryptocurrency for them online, have been hacked. Not to be deterred, the DeFi sector has developed innovative solutions to bolster anti-hacking protections and close weaknesses in the system’s code. Indeed, some DeFi platforms are now equipped with bank-grade security software, providing reassurance to DeFi users that their money is safe.
Additionally, DeFi can improve investor and consumer confidence through regulation. This is not to say that any regulation would work – ill-thought-out rules would limit the sector and stifle innovation. Instead, governments should work closely with DeFi businesses to understand how regulation can be implemented in a way that does not compromise the system’s speed, efficiency or yields.
While the potential returns and simplicity of DeFi have enticed millions to join the sector, there is still some way before DeFi equals and exceeds traditional finance. As the sector works with regulators and develops innovative security solutions to reassure users that their money is safe in DeFi, we can expect consumers to become more confident and give DeFi a larger role – maybe 5-10% – in their investment portfolios. Traditional finance is outdated. DeFi is coming for it – it must be terrifying.
About the author: Philip Blows is the CEO of AQRU, an incubator specialising in decentralised finance. He has held management positions in FinTech and asset management for the last 15 years. At Moneycorp, he established an asset-management and trading division and established robust management systems to track business performance. He was previously the Sales Director at Wealth Wizards, which is a UK-based robo-advice platform, and his first book, ‘The Money Triangle’, was published in 2020.
