Have you ever wondered if there’s some issue with the traditional finance sector? What if we tell you that there is an issue and we will know about it in this article. We will also explore the best technological solution of recent times that can help us to tackle this problem.
The current global financial sector is under the control of a handful of corporate banks. These banks form the core part of the global financial ecosystem today and they keep the world running effectively. We are not saying that the current financial system is all bad per se, but it cannot be ignored that it does have a few shortcomings too. One of the key issues that the current financial system has not been able to solve is about providing financial access to almost everyone around the world.
Why is the DeFi Required?
The number of unbanked global populations is not small by any means and hence, it cannot be ignored. There are roughly 1.7 billion people in the world that still do not have any access to financial services. Isn’t this the failure of the current financial ecosystem?
There could be a long list of problems behind the inability of today’s financial industry to provide financial services to these unbanked populations. Be it a lack of credit history and permanent living address or undeveloped banking infrastructure. Regardless of which of these reasons contributed to this significant failure of the traditional financial system, everyone has to agree that the current financial system is not the best option to provide financial coverage across all corners of the world.
Experts around the world have touted Blockchain and decentralized finance as the solution that could lower the barriers of entry to the financial sector. Thus, those people who could not get a bank account or borrow money through traditional financial routes would be able to do it through decentralized finance. Will decentralized finance or DeFi, as it is popularly known, become a base of the new financial ecosystem? Let’s find out.
What is DeFi?
DeFi is the abbreviation of decentralized finance. It refers to financial smart contracts, digital assets, and DApps that are built on Ethereum blockchain.
The DeFi sector includes all DApps that provide services such as borrowing, loans, staking, or anything which rewards the user for putting their capital in the system. It does not require any middlemen and intermediaries like the traditional banks. This is because the work done by them is performed through smart contracts in DeFi. The cost of transactions is also lower in DeFi as there are no middlemen and intermediaries involved.
What’s the Difference Between Fintech and Decentralized Finance (DeFi)?
One can consider DeFi or Decentralized Finance as the more advanced version of Fintech. The core function of both DeFi and traditional finance is receiving and sending money. However, there are a few distinguishable features between Fintech and DeFi.
One of the key differences between Fintech and DeFi is that the operations of DeFi are managed via code or smart contracts, unlike Fintech. There is no need for human intervention once the smart contract is deployed to the blockchain.
Another feature that makes DeFi apps distinct from the traditional banking apps is that the DeFi apps are transparent about their code. However, the same is not true for traditional banking apps. As DeFi apps are code transparent, anyone can audit them. This makes DeFi more trustworthy as anyone can understand the functionality of the DeFi contract.
DeFi is a global phenomenon from day one and anyone around the world can access DeFi regardless of their location. Due to the absence of gatekeepers like that in the traditional finance sector, anybody can create a DeFi application and anyone around the world can start using them.
Are There any Challenges in DeFi?
DeFi has its share of risks just like the risks with any financial products offering higher than average returns. Cryptocurrencies are also relatively new and thus, one needs specialized knowledge and tools to handle them. The responsibility of taking care of their crypto holding rests fully on the user.
There are no benchmarks and historical data that could aid investors in their decision when it comes to DeFi. This is an additional risk for the investors as a lack of historical data makes it challenging for them to assess the risks associated with DeFi. Hence, they are compelled to do extensive research on their own before investing in DeFi.
Current DeFi Market Scenario
The locked-in DeFi contract volume has crossed a figure of $834 million so far. It has proved to be the fastest-growing service among all decentralized services with over 40,000 monthly users. Yet, the DeFi market is still growing as there’s still a long long way ahead.
Lending DApps dominate the DeFi market with MakerDao maintaining a lead over all other lending DeFi applications. The decentralized marketplaces closely follow the lending DeFi apps in terms of market traction. UniSwap is the leader in the decentralized marketplace segment of DeFi and they have seen a trading volume of $390 million in 2019.
Honestly speaking, DeFi still has a long way to go. DeFi applications haven’t attained a massive adoption that was being speculated in the past. It has so far remained confined within the crypto community. However, the DeFi industry is still growing and we expect that it will attain the heights that it was always meant to.