DeFi, or decentralized finance, represents a new area of financial market development. They consist of services based on so-called smart contracts, i.e., contracts that function without intermediaries based on DLT distributed registry technology. So, what does the future hold for the DeFi sector?
DeFi – the idea of decentralized finance
DeFi is an acronym for the so-called decentralized finance – financial services using a system of smart contracts on the blockchain network. Decentralized finance is based on a peer-to-peer (P2P) network in which all users participate on an identical basis. Decentralized finance, also known as open finance, creates a global, decentralized alternative to every existing financial service. DeFi services are decentralized applications (dApps) that run on the blockchain, primarily the Ethereum network.
Dynamic growth of the DeFi market
The growth of the decentralized finance sector is ideally confirmed by the figures concerning it. According to them, the market capitalization of DeFi has grown from $3 billion in July last year to an impressive amount of more than $200 billion in October 2021. And although they are still incomparably lower compared to the performance of traditional markets, the growth rate indicates the growing importance of DeFi.
The popularity of DeFi is due to its advantages over the current financial system. The alternative is modern solutions that democratize access to financial products on the same terms and to an identical degree for all participants. This is reason enough to keep a close eye on the development of the DeFi sector. As experts argue, decentralized finance will impact the world in various economic dimensions.
What are the characteristics of decentralized finance?
To understand the potential inherent in decentralized finance, it’s worth taking a closer look at its key features. The crucial one is the accessibility mentioned above – the absence of intermediaries typical of the traditional system means that the services can be used by all interested parties without income restrictions, including people excluded from the traditional banking system. Decentralization also reduces costs and streamlines transactions. Equally important is the transparency of data – transactions executed on the blockchain are verified by network users and available thanks to the open-source code formula.
The independence of the DeFi sector is not without significance. Its decentralization is nothing but the functioning of the market without any supervision by states and organizations that can manipulate the market or restrict its operation. The lack of control also reduces the burden of user verification. This happens without sacrificing security – DeFi, which imitates traditional financial systems’ function, provides users with total anonymity of operations and protection of entrusted funds.
How is decentralized finance revolutionizing the market?
Decentralized blockchain technology allows us to replicate almost all services familiar from the traditional market. These include lending and borrowing. Thanks to blockchain, users can now perform such actions without intermediaries. DeFi, by eliminating intermediaries, also solve the problem of expensive and time-consuming operations in the field of mortgages.
DeFi also influences changes in the currency markets. In particular, it contributes to the development of stablecoins. These are cryptocurrencies that maintain their value in relation to traditional (fiat) currencies, such as the US dollar or the euro. In the future, they could be adapted as an everyday currency, not subject to the control of central authorities.
But that’s not all – DeFi is also playing an increasingly important role in decentralized exchanges (DEX), such as UniSwap or SushiSwap, where smart contracts automatically connect buyers and sellers, giving them complete control over their assets. Another application of DeFi involves insurance – parties to smart contracts in the event of failure are protected against loss of funds without the involvement of any centralized insurance intermediary.
The DeFi sector, although in its nascent stage, is gaining rapidly in importance. While finding many applications mirroring the traditional financial services system, it offers several additional advantages over accessibility, transparency and independence. This new form of decentralized financial technology may ultimately influence the future of centralized financial entities – it is already seen as a cheaper, faster and safer alternative to outdated processes. The democratization will allow anyone with access to the internet to transact business freely, take out loans or take out insurance without intermediaries.