Is DeFi’s growth a hype or an opportunity?
It all started with the sudden emergence of Bitcoin, which resulted in the rise in popularity of the Crypto world. Although it was emerging constantly, the investors were quick to predict that the growth of it is quite limited, i.e. Buy, sell, borrow, lend and hold.
And to keep up the spirit of the newly digitized financial industry, it is important to bring up something more powerful, more advanced in this segment. Hence, this leads to the rise of Decentralized Finance products on the Ethereum Blockchain.
But, is it just a temporary trend or an opportunity for the businesses to grow?
Let’s get back to this after understanding what exactly is DeFi and why it is considered being the future of the Crypto world?
What is DeFi?
DeFi, a short-term for Decentralized Finance by which the financial products are accessible on a public decentralized blockchain network. It allows users to create smart contracts (Blockchain-based programs) with no third parties involved, including exchange, bank, brokerage, or corporate acting.
At the July end of 2021, the Defi market capital was estimated to be around $80 billion, which was less than compared to the month of May, which was $89 billion. However, the outcome is not anything related to the fall of the Defi ecosystem, because as per the sources, it is going to rise as there will be a lot of progress in the crypto industry and the projects that will take place will be advanced and matured than now.
Even though, it is still not sure if this will be a sustainable alternative to traditional financial services or a sudden threat to them!
DeFi involves liberty and creativity
DeFi is a trend that is not only linked to the financial side but also has additional benefits as well. This ecosystem can probably move the financial services to the blockchain.
It is because the Defi doesn’t include the stack of rules, regulations, and errors that the other traditional finances carry. Instead, it embraces the creativity and fascination of the users who write smart contracts. As with it, you can produce anything you want to with the help of Stable Coins and other cryptocurrencies. And above that, there is no involvement of gatekeepers or regulators when the users are funding new financially interesting digital products.
Also, NFT, short for Non-Fungible Token, is getting great attention from users. Hence, they are writing decentralized finance scripts on Ethereum for fun kinds of stuff, such as lotteries.
Currently, borrowing and lending are two of the common uses in this segment. Investors have written complicated derivatives contracts that are executed automatically on the Blockchain. Other uses for Defi are margin trading and currency swaps.
It is also predicted that the companies that specialize in creating DeFi products could also start targeting institutional investors in the upcoming months.
…. And carry a severe risk if not properly studied
If you think DeFi is all about good sides, then you are wrong! As with the benefits comes the drawbacks too. DeFi can carry an enormous risk if the research is not properly and thoroughly.
One such case is of the naïve years, i.e. 2016 and 2017 when decentralized finance was new in the crypto world. The businesses used to issue the stock of new coins with no obvious information hence, resulting in deadly legal troubles. The scams are rising and people are still falling for them.
To avoid such circumstances, you need to be well informed about the issuer and the platform. Check if they are sound and solvent and then only proceed further. Although, these platforms also analyze the data related to blockchain for measuring the risks and checking if there are good enough for the benefits they are looking for.
Fortunately, the Ethereum based blockchain technology also allows investors to do thorough research before investing.
The currency of innovation – Ethereum
Unlike traditional finances, Ethereum is transparent throughout the process. The traditional finance services, the dealers, brokers, corporations or exchanges publish only those prices which they come across on platforms. But in Ethereum blockchain, all the activities are showcased and also highlights where the entire market is currently sitting.
When you analyze the blockchain data thoroughly, you can get a comprehensive view of the DeFi product.
Not only this, but the Defi also permits the creative and updated financial instruments in the cryptocurrency sector by using DeFi paired with Stable Coins which are backed by other cryptocurrencies and currencies.
However, a powerful Ethereum blockchain also consumes a lot of energy, although less if compared to bitcoin. Even developers are also planning to upgrade, namely Proof-of-stake, where the energy consumption would be finite.
Also, these Ethereum based blockchains permit you to provide liquidity for crypto loans and other transactions without the actual transfer on ownership of your assets. And in exchange, you will earn fees, revenues and return on the liquidity backing. 4 Best User Testing Tools to Improve User Experience
What’s in the coming months?
Considering the current trends, it can be predicted that the majority of tradeable assets may have digitized proxies (Mostly cryptocurrency tokens) on a blockchain.
Stocks are likely to be digitized first, as leading companies like Apple and Tesla already have crypto tokens for the share price. It can be done because of the primary advantage. They will be flexible and can be traded anytime and anywhere.
With the time strengthening, The Defi can bridge the gap and disrupt the traditional finances by making payments, cash etc available worldwide. However, it doesn’t mean that it is a threat to these financial services. Instead; it is an upliftment for central banks, commercial FI and the crypto community to collaborate and build a new generation of easily available financial solutions.