DeFi: disrupting the financial ecosystem
By Dr Donald Basile, CEO, Roman DBDR and Monsoon Blockchain Corporation
With the evolution of the crypto space, decentralized finance (DeFi) has grown into a billion dollar industry, triggering a wave of global disruption. The DeFi movement is driven by the vision of a financial ecosystem that – instead of a central authority like banks – is controlled by the users themselves. The advantages of this next generation ecosystem are that it is open, flexible, fast and transparent.
This model allows anyone across the world to access a variety of financial applications without the need for an intermediary. Although DeFi dates back to 2016, it wasn’t until 2021 that the concept was co-opted by a diverse community ranging from professional speculators to institutional investors. Almost $ 50 billion has been poured into various DeFi protocols this year. But why is everyone jumping on the DeFi train?
DeFi is a sustainable alternative
There is no doubt that traditional finance is outdated and needs to change the way it identifies people, cuts transaction costs and attracts new markets. But, looking at recent developments in and around space, these changes might not be happening anytime soon.
As the world explores better opportunities, DeFi appears to be a viable alternative. It allows you to borrow, lend, deposit funds in a savings account and trade complex financial products, all without authorization. Take, for example, Compound, a DeFi protocol that allows users to take out loans at low interest rates, as well as earn interest on funds loaned to its liquidity pools. Subsequently, many DeFi platforms have appeared recently, which has driven up the value of assets in DeFi.
Due to its easy access, DeFi has arguably become a sought-after solution for emerging economies with limited access to traditional finance, potentially offering banking services to unbanked or hard-to-bank people. In addition, it offers access to credit, trade and investment opportunities to everyone, regardless of jurisdiction.
In addition to providing an alternative to the outdated financial system, DeFi presents an unauthorized environment where users are in control of their finances. In addition, it offers advantages such as:
- Saving time and money : DeFi removes intermediaries from major financial activities, making transactions much more affordable. For example, transferring a million dollars to Bitcoin costs only around $ 24. Besides, the transaction can be completed in 10-15 days. (Note: there are solutions (like Bitcoin Latinum) that can reduce the fee to $ 2 to $ 4 and the execution time to seconds. On the other hand, a similar transfer through banks would take hundreds of dollars and several. days.
- Decentralized: Unlike traditional systems, DeFi is not controlled by a single entity. All transactions are logged on participating nodes, which verify each transaction and ensure that no one is “double spending” their cryptocurrencies.
- Fast and unauthorized operations: Before DeFi, taking out a loan could take months due to complex verification processes. Today, a user can take out a loan with just one click. However, DeFi has yet to resolve the oversizing issues.
The future of DeFi
While no one can predict DeFi’s future, it is changing rapidly. Developers are exploring new services, business models and combinations of different DeFi protocols. Tools are built to simplify the user experience. Services are evolving towards decentralized governance of protocols.
As the space matures and development continues, we can see DeFi involving the composition of decentralized applications (Dapps) and financial primitives like “money legos”. However, in addition to creating new financial instruments and services, DeFi composability will also bring new risks such as impermanent losses, flash loan attacks, and stack draws. Additionally, the DeFi space is unregulated, which makes it prone to hacks and scams.
Nonetheless, DeFi can be very rewarding – low interest rates, high yields, near zero transactions, and much more. It just requires good regulation and an understanding of the risk of obsolescence.
Dr Don Basile, Stanford PhD, is the CEO of Roman DBDR and Monsoon Blockchain Corporation. He is also the founder of Bitcoin Latinum, a next-generation fully insured, asset-backed cryptocurrency. Based on the Bitcoin ecosystem