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DEFI IN THE SPOTLIGHT

 

A few years ago, not a lot of people had heard of, let alone were knowledgeable about, decentralized finance (DeFi). It was only discussed in the crypto space, especially in relation to Bitcoin and blockchain technology. However, COVID-19 would change all that.

 

DeFi Pulse reported that, since May of last year, the total value locked (TVL) in decentralized finance projects rose an incredible 2,000%. For context, TVL refers to the total amount of assets that are being staked in a specific protocol. This value does not necessarily represent the number of outstanding loans, but rather the amount of underlying supply that an application and/or DeFi is securing.

 

The concept of an entirely new financial system has been accompanied by the blockchain space from the outset. For years, this has been a dream for the blockchain community, but that may change very soon. This vision of a new financial system has taken many steps closer to coming true.

 

Changes in a traditional model

 

Decentralized finance has the potential to leave a huge impact on the way in which banks operate in the future. It even has the capacity to transform the whole structure of the financial system at a macroeconomic level.

 

The dominant business model of commercial banks is to accept deposits and to give their clients loans. The practice of borrowing and lending is one of several cornerstones of an effective financial system. Through this, fund holders are encouraged to provide liquidity to the markets and, in exchange, they earn a return on assets that would otherwise be unproductive.

 

DeFi protocols allow for large-scale borrowing or lending of money between unknown participants and without any involvement of intermediaries. These applications unite borrowers and lenders, as well as automatically set interest rates according to supply and demand. On top of that, these protocols are inclusive, permitting anyone to interact with them whenever they want, from wherever they are, and with any amount.

 

It is not just lending and borrowing practices that are being impacted. There are also investment banks, exchanges, central banks, and insurance companies that DeFi is gradually working its way into. Much like how blockchain technology incorporated its system into various fields, DeFi is doing the same thing in the financial industry.

 

Future development

 

For the first time, we are seeing a financial system develop at a large scale without intermediary interference. As is, DeFi applications are unable to compete against traditional finance solutions when it comes to speed, security, and easy-of-use systems. However, DeFi has successfully created working applications that have garnered billions worth of capital. These resources will help further develop more user-friendly – not to mention competitive – applications for years to come.

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