Hopium Defi
As the world slowly realizes the flaws of our current financial system, with infinite money printing out of thin air and the financial power only distributed to the elite and the few. It is safe to say that the common masses have started to grow aware of how corrupt authoritarianism could possibly get, and this is where decentralized finance (DeFi) fills the gap, shines, and rose to its popularity.
In the previous years, the whole blockchain industry has evolved at a very rapid pace. Large institutions have started accommodating the purchase of cryptocurrencies, offering services, and are now seeking ways to get engaged in decentralized finance. The current growth in DeFi is fueled by venture capitalists, digital native firms, and individuals. The joining of institutions into DeFi will be a major milestone in the industry’s growth toward mass adoption. It will produce impacts on the existing financial system and the current financial intermediation.
DeFi is meant to revolutionize the current centralized financial system by developing a decentralized model that depends on an open-source system. DeFi offers financial institutions a cycle of opportunities for improvement that can improve the current services and operations. How traditional institutions answer this latest form of decentralized intermediation will have a huge impact on their role in developing the digital finance economy.
What is decentralized finance (DeFi)?
Decentralized finance is an umbrella term enveloping the vision of a financial system that works and is run by the capability of smart contracts, without the need for any intermediaries such as banks and central government entities. DeFi applications are striving to cater to the services of traditional finance in a completely permissionless and transparent manner.
Protocols or applications that are created to facilitate this new form of intermediation are called decentralized applications (Dapps) and are created on a public blockchain framework. DeFi projects are normally interoperable, open-source, internet-based protocols that support smart contracts created on public blockchains like Ethereum, to operate financial services. Smart contracts that run on public blockchains are an important factor of DeFi. Smart contracts are code that is kept on a blockchain that independently performs a set of predestined actions. Once deployed, the smart contracts are immutable and all activities happening in the smart contract are recorded on the blockchain which the public can view.
Most DeFi services imitate the existing traditional services that are available in today’s financial structure. Historically cryptocurrencies are too volatile to be used in financial transactions, other than speculative trading. The solution to this problem is the arrival of the “stablecoins”, these are assets that prices are pegged to an external reference market value such as fiat currency. Stablecoins, given their ability to copy the components of traditional fiat currency and compatibility with decentralized applications, are able to move as a primary component for hosting more refined products, identical to the way in which the current financial system operates.
Why is decentralized finance (DeFi) important?
If traditional users start to integrate the decentralized peer-to-peer model on a global scale standpoint to the several forms of financial activities that demand an intermediary, the potential effects on the current financial system are quite significant. DeFi supports individual users to retain sovereignty over their assets, compared to the current traditional financial system, and permits retail individuals the financial freedom and the capacity to decide how to invest their assets without the need for a centralized entity.
DeFi will also affect business-to-business activities, as companies and institutions begin to adopt the blockchain ecosystem, and tokenization of traditional financial instruments such as securities and derivatives progress to maturity.
Another sector of financial disruption will be the tokenization of real-world financial assets on the blockchains. This will open liquidity for investment firms by enabling illiquid assets, such as real estate, to be represented as tradable fractionalized tokenized assets on a blockchain ecosystem. In addition to the technology, these tokenized assets can be issued as collateral or put into investment pools at DeFi protocols. This also applies to the current supply chains, as it enables a more open smart contract committed marketplace, where users transact using privacy-oriented technology on a blockchain.
Final Thoughts
Decentralized finance is expected to have a major impact on how banks will operate in the near future and have the power to potentially shift the architecture paradigm of the whole financial system at a macroeconomic level.
DeFi is still in its infancy stages of growth and institutions will have a huge role to play in nurturing the growth of the ecosystem. As this new financial technology continues to grow and evolve, it will create significant opportunities for organizations that are able to grasp and adapt to the changes in the financial system.