Decentralized Finance (DeFi) is now taking over the financial sector as the interest of people began to grow in it. For the first time in history, a financial system is expanding without a third party at a large scale.
DeFi challenges this centralized financial system by disempowering middlemen and gatekeepers and empowering everyday people via peer-to-peer exchanges.
DeFi applications cannot compete in terms of security, speed, and ease of use with traditional finance solutions yet. But DeFi has produced real, working applications that have already managed to attract billions of capital.
Between September 2017 and the time of writing, the total value locked up in DeFi contracts has exploded from US$2.1 million to US$236 billion as at the time of writing.
What Makes DeFi to Gain Recognition
1. The Coming of Institutional Investors
DeFi gained recognition because mainstream players are getting involved. Many high-street financial institutions are beginning to accept DeFi and seeking ways to participate.
For example, 75 of the world’s biggest banks are using blockchain technology to speed up payments as part of the Interbank Information Network, spearheaded by JP Morgan, ANZ and Royal Bank of Canada.
Major asset management funds are starting to take DeFi seriously as well. Most prominent is Grayscale, the world’s largest crypto investment fund.
In the first half of 2020, it was managing over US$5.2 billion of crypto assets, including US$4.4 billion of Bitcoin. The Grayscale holds over $46 billion in crypto assets as of the time of writing.
2. Covid-19 Global Pandemic
The effect of the COVID-19 pandemic has driven global interest rates even lower. Some jurisdictions, such as the eurozone, are now in negative territory and others such as the US and UK could potentially follow.
DeFi potentially offers much higher returns to savers than high-street institutions: Compound, for example, has been offering an annualized interest rate of 6.75% for those who save with stablecoin Tether.
Not only do you get interested, but you also receive Comp tokens, which is an added attraction. With two-thirds of people without bank accounts in possession of a smartphone, DeFi also has the potential to open up finance to them.
3. It Serves as a bank for the blockchain space
Users typically access DeFi platforms through software known as dapps, or decentralized apps, most of which run on the Ethereum network.
They connect their digital wallet to the app and select a service from a drop-down menu. Functions handled at a traditional bank by a loan officer or teller are automated.
4. No Strict Regulation
People are using Defi because it does not have strict regulations like traditional finance.
In the traditional finance system, there is a legal requirement that lenders and borrowers know one another’s identities and that the lender assesses the borrower’s ability to repay the debt.
In DeFi, there are no such requirements. Instead, everything is about mutual trust and preserving privacy.
But for all its promise, DeFi has a long road ahead, especially when it comes to uptake by the general public.
“The promise is there,” says Simerman. “It’s up to us to continue educating people about the potential, but we also need to keep working hard to build the tools that will allow people to see it for themselves.”