The launch of Decentralized Finance (DeFi) protocols in 2020 marked a significant phase in the growth of the crypto industry. As of writing, the total value locked (TVL) in this market stands at $69 billion, with Ethereum DApps taking the lion’s share. While the ongoing market slump has also affected the DeFi ecosystem, it is hard to overlook the fundamental developments that are currently taking place.
Most stakeholders who believe in DeFi have embarked on building a stronger ecosystem, one that will not only solve the shortcomings in traditional finance but emerge as the status quo of tomorrow’s financial markets. Contrary to the approach taken by today’s financial institutions, DeFi is built on decentralized infrastructures which means that users do not have to go through a middleman to access financial services.
So, how exactly does the DeFi ecosystem work? At the core, DeFi protocols leverage smart contracts to design a financial ecosystem where contracts are executed based on pre-coded conditions. Simply put, DeFi protocols are more transparent and reliable, given that no one can interfere with a process or execute in their favour. This is a big challenge in the traditional financial sector where institutions have always had an upper hand.
Looking at DeFi’s value proposition, one can understand why it is facing so much opposition from regulators and legacy players in the finance sector. Not because it is harmful to investors but its underlying potential in freeing the masses from the chokehold of centralized intermediaries. Luckily, the wave is becoming more unstoppable by the day, even big banks such as JP Morgan are gradually bending the knee.
Bringing Control Back to the Masses
As history has shown time and again, human beings crave to be free in almost every aspect of their lives. Unfortunately, that is not the case, governments control both politics and economic conditions through agencies such as the Federal Reserve (FED) and the Securities Exchange Commission (SEC). Though efficient to some extent, we have had several instances where these oversight authorities led to a financial crisis.
What if power was brought back to the people? A market where the main participants have a direct say through Decentralized Autonomous Organizations (DAOs). Well, the DeFi ecosystem is specifically built for this purpose. Unlike traditional finance, DeFi operates as a permissionless market, allowing anyone access to financial products that are normally cumbersome for the average folk to acquire.
Today, one does not have to go to a bank or fund manager to open a savings account. DeFi has ushered in lending and borrowing protocols such as Aave and Compound, both of which feature higher interest rates than the meagre returns offered by the existing institutions. More importantly, these saving avenues can be accessed by anyone across the world, making them a perfect tool in bridging the financial inclusion gap.
With DeFi, it is also possible for small-time investors to invest in the financial markets through protocols like SOMA.finance. This globally compliant multi-asset DEX has partnered with a U.S regulated broker ‘Tritaurian Capital’ to offer crypto assets, tokenized equities, ETFs and STOs. Ideally, any interested investor can access all the aforementioned products without incurring the cost of going through a middleman or other hurdles such as high capital requirements.
“DeFi may reduces reliance on intermediaries, which are currently required to maintain the trust between the participants in a financial transaction. By reducing the number of parties involved and streamlining operations, efficiency of financial processes can be increased.” read a report by Deloitte.
It is also noteworthy that DeFi innovations are still in the development stages, projects keep on experimenting which infrastructure is best suited to set the stage for mainstream adoption. For example, decentralized exchanges (DEXs) like Blueshift are building a more elaborated Automated Market Maker (AMM) model to solve the liquidity challenge. Unlike Uniswap’s standard AMM model, Blueshift leverages portfolios instead of pairs to hold liquidity
DeFi might still be a young area of innovation but that does not disqualify its potential in changing the financial ecosystem to become more people oriented. Gone are the days when institutions gamble with clients’ money while paying out peanuts in interest rates. The world needs a financial ecosystem that is focused on the best interests of investors as opposed to filling up the pockets of a few individuals.
More interestingly, DeFi has weathered the storm, having survived the recent crypto market bloodbath that wiped out some of the biggest players. Could this have been possible if it were up to a handful of decision makers? Your guess is as good as mine, finance ought to shift from centralized ecosystems to decentralized platforms where code is the ultimate executer.