Decentralised Finance (DeFi), an alternative to traditional financial services, allows people to carry out transactions such as lending, transferring, investing, trading, borrowing and saving quickly
The global DeFi platform market size is also expected to reach nearly $507.92 Bn at a steady CAGR of 43.8% by 2028 according to the latest analysis by Emergen Research
In the coming years, DeFi-based tokens and projects are going to solve traditional financial problems, replacing the conventional financial landscape to a great extent
Decentralised Finance (DeFi), an alternative to traditional financial services, allows people to carry out transactions such as lending, transferring, investing, trading, borrowing, and saving quickly. The process is carried out automatically on the blockchain, with no intermediaries such as a bank, exchange, or brokerage.
To understand DeFi, first, let us make a small comparison with traditional finance or TradFi. Think about the intricacies involved in obtaining a loan from a bank. To obtain a loan, one must go through multiple banking system procedures, divulge a lot of personal information, and then hope for a loan at a reasonable interest rate. All of this includes tons of paperwork which can be pretty time-consuming. Now, imagine getting a loan within seconds with no paperwork and no sharing of any personal information. That is the potential of DeFi!
Why Is DeFi Rising?
DeFi projects and tokens have gained traction recently, driving the market with asset management, borrowing, lending, and trading. The global DeFi platform market size is also expected to reach nearly $507.92 Bn at a steady CAGR of 43.8% by 2028, according to the latest analysis by Emergen Research.
DeFi solves for all the significant pillars of finance — owning assets, generating yields on these assets, borrowing, and lending, at a fraction of the time in comparison to the traditional channels. All these transactional activities happen on the blockchain, and nobody has the authority to alter the data once it is live on the blockchain.
The primary factor behind the growth of the DeFi market is the transparency in making financial transactions and settlements on DeFi platforms on a real-time basis. DeFi platforms help automate various financial services using blockchain and smart contracts. Through DeFi, users can have more control over their assets rather than intermediaries, all the while allowing consumers to keep their sensitive data to themselves.
Currently, the DeFi market is being utilised by people who know how to interact with smart contracts and manage assets. In the coming years, though, retail investors are also likely to enter the market and access decentralised financial services across the globe.
How Is Blockchain And DeFi Transforming Modern Finance?
When it comes to lending and borrowing, DeFi can provide interest-based services with great ease. Like traditional borrowing, DeFi lending projects also require borrowers to borrow loans based on collaterals. The identity of borrowers and lenders is hidden behind cryptographic digital signatures. These projects can connect borrowers to lenders, profiting both parties. In return, the lenders also receive their part of the interest for lending tokens to the borrowers. Stablecoins are the most popular among lenders and borrowers in the DeFi space due to their stability.
Another interesting thing to note is that the applications of DeFi will enable transactions beyond conventional boundaries, making it accessible across various markets and regions. For instance, a woman living in a small village in the northeast part of India running a market stall can borrow a loan at competitive rates from any DeFi project faster with one click through her smartphone.
Apart from lending, borrowing, and saving, users can also take out an insurance policy through DeFi. Investors can claim DeFi insurance for attacks on DeFi protocols, price crashes, hacks, or smart contract failures. Since these protocols are built using publicly visible smart contracts, the payout terms are available for all to see. This can ensure more transparency around the space.
The tamper-proof data of the transactions across the blockchain also increases the security and auditability of these transactions. Novel instruments such as synthetic assets and flash loans on the blockchain infrastructure have unlocked liquidity and growth across the economic systems.
The Ethereum network is the most popular platform for building different blockchain-based applications, which DeFi projects use for its ability to execute transactions and smart contracts. The issue with making transactions on the Ethereum blockchain is that it requires paying high gas fees. This problem can be solved by the upcoming projects in the coming years, accelerating the growth in the industry.
Lending and borrowing projects on DeFi let users have liquid capital without selling any of their assets. It altogether eliminates the complex process of sharing a bunch of private information and then going through tons of paperwork to get to the approval stage. The approval process then takes its own due time. With DeFi, this whole process is frictionless and achieved in seconds. Once the user has deposited the collateral, the user can take a loan against this collateral. This revolutionary potential of DeFi makes it one of the most promising sectors in the crypto ecosystem.
For the above potential reasons, it is very much likely that many DeFi-based tokens and projects with innovations are going to bring great solutions to the traditional financial problems in the coming few years, replacing the conventional financial landscape to a great extent.