While the global investor community was latching onto the crypto bandwagon, a silent revolution has been breeding in its wake over the past few years. Decentralized Finance (DeFi) applications refer to the entire space of blockchain projects that include open lending platforms, decentralised exchanges, and digital asset staking, while many other use-cases are emerging regularly. DeFi is powered by smart contracts which are self-executing computer codes used for automatically executing transactions.
DeFi has been democratizing finance and will play an integral role in the future of finance. It is evolving at a rapid pace and is instrumental in creating a decentralised economy where anyone from anywhere in the world can now connect and transact with each other directly, opening a new range of possibilities for financial transactions that did not exist previously.
Based on blockchain technology, DeFi protocols and products rely on cryptology and smart contracts to execute transactions when predefined conditions are met. Decentralization allows you to become a part of the banking system, potentially helping to bank the unbanked. This is a very important element that ties in with the Sustainable Development Goal (SDG) of financial inclusion, adopted by world leaders at the UN Sustainable Development Summit in New York way back in 2015.
DeFi allows programmers to continue developing a wide range of secure and efficient financial platforms from anywhere in the world, bringing in rapid innovation and autonomy to contribute towards the global GDP. It brings in opportunities to the common person that were only available to large players, including access to international markets, access to new forms of lending and borrowing, faster and cheaper transactions, tokenization of assets, etc.
Crypto assets and DeFi in conjunction have been offering an alternative way of investing money, opening up the possibilities to earn positive returns on any capital employed. DeFi products like staking pools, Liquidity mining and Yield farming continue to provide crypto investors with an opportunity to earn rewards on their crypto holdings, while they hold onto their cryptocurrency investments for the long term.
DeFi protocols and platforms are distributed across the world on blockchains that facilitate international financial transactions. And as there are no intermediaries involved, DeFi applications allow transactions to be conducted at very low costs and sometimes at no costs, allowing cheap currency conversions. Users can automatically lend and borrow funds using crypto assets as collaterals within DeFi and this automation via smart contracts has the potential to accelerate financial transactions, decreasing costs while providing more lending opportunities.
Users maintain control of their assets as DeFi allows them to buy, sell and transfer digital assets of their own accord. Users are custodians of their funds in DeFi as access to their crypto funds is restricted to the account holder due to the existence of encrypted passwords, and private keys. Hence, asset management in DeFi is as per the user’s choice with complete ownership control.
Due to the transparency that blockchain technology provides, decentralisation allows the analysis of compliance around the behaviour of the users’ addresses as every translation is recorded on the ledger and can be traced back. The real-time monitoring of the addresses protects against data breaches, fraud, and financial crimes.
With more than one billion people living on less than $1.90 daily, DeFi innovation is gaining acceptance as a sensible business model for humanity, bringing in the digital revolution. DeFi projects are bridging the gap between decentralized finance infrastructure, assets, and the underbanked and have the potential to accelerate adoption. This will change the way we bank and interact with assets of all sizes. This shift is as large as the move onto the internet with the tokenization of all assets and value represented digitally.
With the total value locked (TVL) in DeFi protocols exceeding $55 billion as of August 2022, both GenZ investors along with the older millennial and boomer population are increasingly leaning towards DeFi platforms. Not only does this bode well for cryptocurrencies, as more people look to invest in them as a store of value, but also reflects the impending investments that will undoubtedly be pooled into DeFi protocols consequently.
( The author is CTO & CoFounder, CoinDCX)
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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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