Decentralized Finance (DeFi), an alternative to conventional financial services, enables individuals to rapidly conduct transactions such as lending, transferring, investing, trading, borrowing, and saving. The process is executed automatically on the blockchain without intermediaries such as banks, exchanges, or brokerages.
To comprehend DeFi, let’s first make a brief comparison to traditional finance or TradFi. Consider the complexities involved in obtaining a bank loan. To get a loan, one must complete several banking system procedures, disclose a great deal of personal information, and then hope for a loan with a reasonable interest rate. This requires a great deal of paperwork, which can be quite time-consuming. Imagine obtaining a loan in mere seconds, with no paperwork and no personal information exchanged. This is the capacity of DeFi!
Why Is DeFi Rising?
DeFi projects and tokens have recently gained traction, driving asset management, borrowing, lending, and trading on the market. According to the most recent report by Emerging Research, the global DeFi platform market is projected to reach nearly $507,92 billion at a CAGR of 43.8% by 2028.
DeFi addresses the four major pillars of finance — asset ownership, yield generation, borrowing, and lending — in a fraction of the time required by traditional channels. All these transactions occur on the blockchain, and no one can alter the data once it has been recorded.
The growth of the DeFi market is primarily driven by the real-time transparency of financial transactions and settlements on DeFi platforms. Using blockchain and smart contracts, DeFi platforms automate a variety of financial services. DeFi enables users to control their assets more than intermediaries while allowing consumers to keep their sensitive data private.
Those who can interact with smart contracts and manage assets exploit the DeFi market. However, retail investors will likely enter the market and gain worldwide access to decentralized financial services in the coming years.
1. Exchange Platforms
Decentralized exchange platforms are one of the most well-known examples of DeFi products. The concept of a decentralized exchange is based on peer-to-peer protocols. Suppose you wish to exchange Ethereum for XRP. You rely on a third-party platform when using Binance or Coinbase. Decentralized services are distinguished by their use of intelligent protocols for transactions. Uniswap pools all tokens for smart contracts and distributes funds to users upon contract fulfillment.
2. Crypto-Based Synthetic Assets
Synthetic crypto assets constitute an $8 billion niche in the DeFi market, allowing for trading synthetic cryptocurrencies or market shares on various P2P platforms. Synthetic assets based on cryptography give users access to multiple assets without holding the underlying asset. Consider the decentralized investment platform Abra. If an investor purchases $1,000 worth of Apple shares using Bitcoin, the platform will add or subtract Bitcoin from the investor’s account based on Apple’s stock market position. UMA and Synthetix are also popular platforms dealing with synthetic assets.
3. Automated Investing Platforms
In addition, the DeFi market offers automated platforms for cryptocurrency investors. Bloq, a blockchain infrastructure company, recently launched Vesper, a tool for automating DeFi transactions. The entire concept of the tool closely resembles that of mutual funds but in blockchain format. Yearn Finance is an additional suite of DeFi tools for decentralized lending, yield farming, and insurance based on Ethereum. Yearn Finance is suitable for passive investing, as investors need not be protocol experts.
4. Open Money Marketplaces
Lastly, open money marketplaces powered by DeFi smart contract development are game-changing applications for decentralized investors and borrowers. The compound is a prime example of such a market in the financial industry. Lenders invest their funds in a pool of liquid assets from which borrowers can profit, facilitated by smart contracts that locate suitable investments for each borrower. It operates without the need for a bank or intermediary. When a contract goes into effect, it is automatically assigned to both the lender and borrower and expires when all obligations have been satisfied. The DeFi industry is a relatively new and expanding field, offering numerous options for both investors and regular users of financial services. However, the potential for this niche is limitless, and new ideas in smart contracts will undoubtedly emerge over time.
The DeFi’s Benefits for Small and Mid-Sized Businesses
DeFi is beneficial for more than just regular consumers. Small and medium-sized businesses can find a variety of workflow applications for decentralized finances. Determine the advantages that the DeFi economy provides to companies.
1. Decentralized Crediting
Startups and small businesses have a primary need for capital. Sadly, investors may reject some innovative ideas, leaving them without funding. DeFi services can lend money to startup founders who are confident and willing to provide collateral. If the project is successful, the entrepreneurs will repay their debt and have a minimum viable product to assuage investor concerns.
2. Staying on Top of Trends
Early adoption of blockchain permits you to market your product to new markets and attract new audiences. In addition, a new cryptocurrency payment method enables you to attract customers who may need help using other payment methods.
Even though the majority of people are unfamiliar with cryptocurrencies today, businesses will eventually increasingly accept crypto payments. Therefore, it is preferable to incorporate them now while everyone else is ignoring this trend. Simply put, blockchain will give you an advantage over your competitors.
Another issue with cryptocurrencies is the volatility of Bitcoin and other altcoins. Bitcoin’s exchange rate will likely decrease once more. If you’re not a fan of heart attacks, stablecoins are a better investment. Stablecoins are tokens whose exchange rate is pegged to an underlying asset. For instance, the cost of a USDC token depends on the U.S. dollar price. To avoid being a victim of exchange rate fluctuations, it is safer to store your funds in stablecoins.
4. Innovative Savings
DeFi introduced a new method for businesses to manage their savings and investments. Blockchain-based lending applications enable companies to earn interest by securing their assets within a particular lending protocol. This led to numerous lending platforms offering customers attractive interest rates. Cream Finance, Aave, and Fulcrum are the most prominent decentralized lending services.
DeFi is one of the most recent and important developments in the evolution of internet-based digital assets and finance. Over time, this decentralized ecosystem and its participants will converge with seasoned institutions that serve as the traditional financial system’s trusted gatekeepers. Whether institutions prepare to oppose or embrace this new technology and form of intermediation will substantially impact their operations and long-term success in the emerging digital economy.