- Decentralized finance is the epitome of the crypto concept.
- Crypto projects are viewed as a hedge against economic collapse.
- DeFi aims to rewrite how the entire banking system works.
- Traders are exploiting leveraged Dai positions to make big gains.
- The crypto industry will resolve its problems in some possible scenarios.
Today, DeFi is to crypto what oxygen is to humans. Yes, the realm of Decentralized Finance has become so crucial to the cryptocurrency industry that almost every significant development today has DeFi roots. Even the ICO mania of 2017 cannot be compared to the giant bubble that is DeFi. Bubble or not, it is creating crypto millionaires faster than you can imagine.
So, what fuels DeFi? Decentralized finance is the epitome of the crypto concept – the power to build financial solutions that rival conventional financial and banking services, albeit on a decentralized architecture. It means offering money-related services outside the purview of governments, authorities, and conventional rules. Sounds exciting, doesn’t it? No wonder millennials fed up with banks are thronging to invest in next-gen technologies.
As the foundations of global economies look increasingly shaky, decentralized apps are finding more footing among the investors.
DeFi continues to challenge conventional banking
The fight to stay truly decentralized has given birth to practical decentralized finance services. Today, crypto projects are viewed as a hedge against economic collapse. Investors look for dedicated decentralized solutions to safeguard their wealth against government defaults, economic uncertainties, and the deteriorating global geopolitical situation. Bitcoin has already shown its worth as a safe haven asset in COVID-19 times by outperforming stock markets.
As DeFi evolves, new stablecoins have emerged that promise much more than traditional cryptocurrencies. For example, ‘Dai’ stablecoin offers BTC-like capabilities with global outreach and is pegged to the US dollar, which reduces its volatility quotient.
Another popular project, Compound, delivers traditional money market fund services in a crypto setting. Dharma, a DeFi app, lets its users earn investment returns from issuing an underwriting debt just like a conventional setup.
DeFi redefines banking to transform ailing economies
Alex Pack of Dragonfly Capital explains how DeFi aims to rewrite how the entire banking system works by rerouting the services through permissionless, decentralized architecture. As per Alex, such an event happens after 50 years, making the current movement a plethora of opportunities.
Salil Deshpande of Brain Capital adds that investors are initially attracted to crypto assets due to their censorship-resistant features. Naturally, people love their privacy, and DeFi solutions deliver anonymity. Despite the initial euphoria, DeFi will evolve to offer even better financial products in the long run.
Deshpande cites Venezuela as a prime example where decentralized technology has come to the rescue of a population under acute financial distress. Oil price decline and disastrous financial policies have roiled the country, causing steep inflation. Transparent and efficient decentralized finance has helped Venezuelans preserve their wealth and hedge against inflation. Jill Carlson of Goldman Sachs founded the ‘Open Money Initiative,’ which studies the Venezuelan crypto realm. She says that crypto has helped citizens safeguard their wealth against inflation.
Stablecoins are making the moolah, or are they?
What surprises the most about DeFi is its staggering rise. For example, stablecoin Dai has gained immense favor amongst traders, but adoption remains a concern. At present, 21,000 investors hold Dai, and it performs 13,490 transactions every day.
The complex rules governing Dai minting also includes ‘stability fees’ and ether pledging benchmark. Presently, Dai holds $339 million worth of ether. In comparison, Dharma holds $10 million, and Compound boasts $34 million of locked assets.
Dai also has a humanitarian angle where it is employed in developing countries to empower financially weak strata of society. At the same time, traders are exploiting leveraged Dai positions to make big gains on Ethereum. Traders borrow Dai by pledging ether and then again employ these Dai to purchase ether.
Risks and challenges of DeFi
Decentralized financial applications are not fool-proof, as smart contracts can be hacked. Open-source code is vulnerable to hacking attacks.
Skeptics of the movement don’t believe that DeFi will contribute significantly towards mainstream cryptocurrency adoption. Jeff Dorman of Arca asset management firm says that despite the technological prowess, the technology is not promising. He believes stablecoins built by established firms are more trustworthy, including Facebook’s Libra.
Despite all the charms promised in a utopian DeFi future, there are risks along the way. Governments and authorities will likely get involved in one way or another. Besides, the whole crypto concept goes beyond just surpassing governments – it is about an entirely new financial ecosystem. So, it is best to learn to walk before dreaming of winning a marathon.
Rising transaction fees is one of the consequences of explosive DeFi growth. Smart contracts are getting more expensive to execute. After a certain level, it becomes illogical to pay enormous fees for simple, smart contract execution, and traders find it unviable to employ decentralized apps. Imagine paying $30 ETH for one transaction.
What’s in store for 2020 – Probable trends
The crypto industry is known to resolve its problems in unique ways. So, current DeFi problems will be solved, but it remains to be seen how it would be done. Here are some probable scenarios:
- As Ethereum moves towards ‘staking’ nodes and ditches miners, transaction costs will be crushed.
- Ethereum’s network congestion issues will be resolved by fine-tuning the present apparatus and boost computing power.
- DeFi applications can shun Ethereum in favor of Ethereum-like platforms that are more attuned to serve investors.
- Extensive improvements in coding can help re-engineer apps into lean, efficient performers consuming less computing power.
- DeFi can leverage convention banking channels to drive costs lower and offer next-gen financial solutions to the traditional user base.
Remember, the DeFi horse has bolted, and there’s no holding it back now. Even though there can be potholes on the path, but the horse has bolted. Many first-time users define DeFi as an epiphany, and they aren’t treading backward anytime soon.
While some players will wither, major DeFi participants have seen what the future holds in store. The remaining 2020 will see incompetence weeded out, and dreamers chug forward. Just like Bitcoin millionaires, smart investors know the ‘buy-and-hold’ game better than losers.
Time will soothe the doomsayers who moan about the whole DeFi explosion. Investors can rest easy knowing that global dominance isn’t achieved without some bumps on the road to glory.