How is DeFi Re-defining Finance
Blog: NASSCOM Official Blog
Decentralized Finance or DeFi is a paradigm shift in FinTech. If you are enthusiastic about cryptocurrencies, blockchain, or fintech, you might have come across this buzzword for sure. Currently, the DeFi industry is growing widely with more than $8.91 billion dollar worth of assets locked up in DeFi projects. What is even more interesting is the shift of the institutional investors to DeFi, in order to break free from the traditional financial system.
Before delving deeper, let’s quickly find out what Decentralized Finance is.
Decentralized Finance is a borderless, open alternative to every financial service like insurance, loans, trading, savings accounts, and much more. The decentralized applications or dApps enable financial systems to operate without any central authority like outdated financial systems.
Initially, DeFi caught the attention of the crypto and blockchain enthusiasts, but now, grabbed the traditional financial players’ attention.
- As per Fidelity Digital Assets’ recent survey, around 80% of the institutions are interested in digital assets investment.
- The Chicago DeFi Alliance, comprising top trading and brokerage firms, was created to support the DeFi startups’ growth.
The main objective of DeFi is to address problems and inefficiencies like increasing liquidity, improving financial inclusion, and reducing costs.
#1 Financial inclusion is the need of the hour as the traditional financial services are taken for granted by many. As per the Global Findex Database, $1.7 billion people lack basic access to financial services.
#2 Another advantage that DeFi can provide is democratizing banking services. For instance, Selfkey offers decentralized identifiers which not only eliminate the need for centralized authorities but also give users control over their data.
#3 DeFi helps in unlocking the potential for better interest and reduced costs. In the traditional system, it’s expensive to send money across borders.
Examples of DeFi Applications
DeFi savings apps like Linen App provides a non-custodial wallet which enables the users to connect their U.S. bank account to supply digital dollars to a liquidity pool on the blockchain.
Peer-to-peer protocols like Compound establishes money markets with interest rates set on algorithms. Another such example is Aave, which is an Ethereum-based P2P lending platform. These DeFi projects are a lot more appealing than credit systems.
Another interesting example of DeFi is decentralized exchanges or DEXes, where the users can trade digital currencies without the need for any exchange to hold their funds.
To learn more about the current applications of DeFi, here are some of the fintech verticals being disrupted by decentralized Finance:
#1 Financial Data
As we know, data within financial markets are controlled by a group of stakeholders. But with DeFi, it will enable the democratization of data – how is it sourced or presented, and how it creates incentivizing reward systems. DIA is aiming to become open-source and transparent. By using DeFi, DIA would provide financial institutions with a verified, immutable source of financial market data for all kinds of market or assets type.
The DeFi lending operations operate on the benefits brought by the Ethereum blockchain, which enables to source and secure funds through transparent protocols. DeFi has entered the world of innovation through no-collateral loans and compounding interest rates. As the companies are leveraging the industry’s composability, it’s allowing applications to integrate with one another through a vast network effect.
#3 Decentralized Exchanges (DEX)
As stated earlier, DEX is one of the most important innovations of the blockchain industry, as the users can control their funds stored in external wallets. In the case of hacks or scams, the risk of losing all your funds can be alleviated.
#4 Asset Management
DeFi offers certain advantages when it comes to Asset Management, too. Some of the benefits include automation, non-custodial ownership of assets, global access, and financial inclusivity, as per DeFiRate. DeFi products are growing at a rapid rate to become more accessible and user-friendly.
There are DeFi insurance products that help protect users against errors pertaining to custodians. The insurance can be applied to personal wallets, pools, and smart contracts for lending and staking. The ultimate goal of DeFi insurance products is to cancel costly traditional insurance monopolies, and make insurance more flexible and affordable to all kinds of users, be it institutional or casual.
In the near future, we can expect to come across additional monitoring tools, security initiatives, or insurance projects. The demand for such automated services is increasing, as the developers realized they can’t tackle security issues on their own for a long time. Smart Contracts insurance is going to play a dominant role in the DeFi market. DeFi can reduce risks for both the developers and users. While every new technology comes with its challenges, it’s exciting to see DeFi creating a better and accessible financial system.
Nischal Shetty, Founder & CEO, WazirX
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