The tempestuous performance of the global economy during this year has impacted all asset classes, including digital assets. Despite the unpredictability of the overall economy, the cutting-edge application of blockchain technology known as decentralized finance (DeFi) continues to shine brightly.
The idea of decentralized finance, sometimes known as DeFi, is important in the bitcoin realm. The goal of the DeFi organization is to create an entirely new financial system that is not dependent on the existing financial sector (TradFi). This goal is being pursued with an investment of billions of dollars and the contributions of thousands of developers worldwide.
What is Decentralized Finance?
The goal of decentralized finance often called open finance, is to offer a global, Decentralized finance development company alternative to all the conventional financial services that are now available. These services include insurance, savings accounts, and loans. The ability to make financial transactions will soon be open to anyone with a smartphone and an internet connection.
The goal of the decentralized finance development company, or DeFi, is to bring the world's 1.7 billion unbanked persons into the mainstream of the global economy through the provision of financial services to them.
DeFi: Where is the problem?
Following the worldwide financial crisis in 2008, the governments and central banks of the world's most important economies pledged. They concluded that the banking sector would never again jeopardize our economic and social security.
Since banks' excessive risk-taking brought on the 2008 financial crisis, the finance industry has evolved to play it safe by becoming less inventive and unwilling to adopt system-wide modifications. This is because the banks' excessive risk-taking brought on the crisis.
Another alarm went off for the banking sector when the global pandemic wreaked havoc on the socioeconomic life of a large number of people. The terrible effects that Covid-19 has on the economy need to be addressed to develop a stable and long-lasting recovery.
DeFi – What is the Solution?
Both the DeFi and blockchain technologies are still in their infancy stages. It is quite likely that distributed ledger technology (DLT) will act as the "tracks" for all financial goods and services within the next ten to fifteen years. This prediction is based on strong probabilities.
To put it another way, a bank that drives itself, other banks, and all aspects of financial and economic activity will be completely automated, with no human intervention at any time.
In the future, when machines can communicate with one another as part of the Economy of Things, DeFi will enable all goods and services to operate independently.
The concept of "embedded finance," which refers to embedding financial services into a product or service that is not financial, will be considerably improved due to this change.
The ecosystem that surrounds decentralized finance depends heavily on both lending and borrowing.
The introduction of platforms for lending and borrowing has greatly strengthened the DeFi ecosystem. Users can borrow money against their cryptocurrency holdings by entering into smart contracts.
Other users can use smart contracts to protect their cryptocurrency holdings and generate revenue by lending their coins to borrowers. This is possible thanks to the decentralized nature of bitcoin.
It is important to note that returns generated by lenders in the DeFi ecosystem are far higher than those generated by the conventional banking sector. The smart contract returns nearly all the profit from lending money directly to the lender.
This is possible because maintaining a smart contract is substantially cheaper than managing a normal bank. A great number of people put their faith in open-source smart contracts in the hope that they will generate large profits for themselves.
The advantages of the DeFi system and their impact on economic activity:
The traditional monetary system does not compare favorably to the Decentralized finance development company system, which has various advantages. The economy is impacted due to these privileges, which play a role in DeFi's rise to power.
- No Human Violation and Abuse:
Using smart contracts by DeFi helps limit the likelihood of errors or misappropriation caused by humans. These contracts carry out their terms with no involvement from a human being. As a result, there is no space for error on the part of humans.
In addition, smart contracts regulate the flow of money both within and outside the system. As a direct consequence, individual instances of poor financial management are minimized.
- Financial Services Are Easily Accessible:
The Ease with Which One Can Access Financial Services Has Been Improved The utilization of the numerous financial services available to businesses has become less difficult due to DeFi.
For instance, acquiring a loan through a DeFi system requires little more effort than a few mouse clicks.
In contrast to traditional banking institutions, our company requires the completion of a large number of time-consuming procedures before issuing even a single loan. DeFi services are available to anyone who has access to the internet at any time and from any location they want.
- No Permission Required:
Before the introduction of DeFi, customers needed permission from their banks to access their funds. It was an annoying inconvenience that you required our authorization to access our funds.
On the other hand, using DeFi enables the user to access his cash without the need for the participation of a third party.
- Transparency
They can provide transparent services due to the secure ledger that DeFi utilizes, in which all financial transactions are recorded. The ledger and all of its entries are available to anyone who wants to look at them.
The openness of using DeFi services is a significant perk because it encourages increased productivity and shields customers from the risk of being financially defrauded.
In the coming years, DeFi might outrank the conventional financial system
For the following three reasons, we believe that decentralized finance has the potential to overtake traditional methods of financial management and to receive more attention in scientific, economic, and public debates:
- Speed of Economic Boom:
The scalability of the DeFi ecosystem is very high, and it can be found worldwide. As soon as DeFi (or a single DeFi application) establishes its usefulness, it will be possible for exponential growth to occur.
The total value locked (TVL) on smart contracts is monitored on the DeFi Pulse website across all compatible DeFi applications (i.e., how much money has been poured into the ecosystem by its users).
The rise in TVL between June and August of 2020 illustrates the potential for exponential development that DeFi possesses.
On January 1, 2020, the TVL was $0.7 billion, but it continued to increase during the year, reaching $1.9 billion on July 1, $4.0 billion on August 1, and $8 billion on September 1.
- Growth Potential
There is still plenty of room for improvement: According to Messari. This company researches the cryptocurrency business. The market value of all DeFi applications accounted for less than 1.5% of the overall market in July 2020.
Consequently, one may claim that the crypto ecosystem has great development potential; nevertheless, this potential can only be realized through the exchange of assets.
The true potential of Decentralized finance development company can be determined by expanding the scope of the investigation beyond the cryptosphere.
- Expanison of New Market
The World Bank estimates that 1.7 billion adults do not have access to the financial services provided by banks. These monetary services are accessible to anyone, anywhere globally, thanks to DeFi imposing no access limits.
All that's needed are cell phones, power, and internet. If residents of an area lack trust in the financial institutions available to them, if the cost of using traditional banking services is substantial to the amount of money they bring in, then direct economic interactions may be worth considering.
However, to reach individuals who do not have bank accounts, Decentralized finance development company programs will need to build more intuitive user interfaces and speed up the on- and off-ramps for fiat currency.
Wrapping it Up
Decentralized finance (DeFi) will become progressively integrated into our existing financial systems as technology advances, resulting in the financialization of all assets and the transfer of full power to their owners.
DeFi will make it possible for people who do not have bank accounts to engage in the economy, lower the costs of doing business, and make new investment opportunities available to individuals worldwide.
The trend toward decentralization is mirrored throughout many industries, including the financial sector.