Cryptocurrency In Decentralized Finance (DeFi)

Currently, decentralized finance (Defi) is one area in cryptocurrencies that has been attracting huge attention. Decentralized finance refers to financial services that make use of smart contracts. It is an umbrella term for different financial applications in cryptocurrency or blockchain, geared towards disrupting financial intermediaries. These smart contracts are automated agreements that don’t need intermediaries like traditional banking institutions. This has caused a huge rise in the market capitalization of all the tradeable tokens used for Defi smart contracts. Lots of Defi tokens have risen in value over the past year.


Maximum potential disruption
Most of the Defi tokens are built on the Ethereum blockchain network. They are arguably the next step to the revolution in disrupting the financial technology that began more than a decade ago with Bitcoin. One area that this disruption has kick-started is trading cryptocurrencies on decentralized exchanges (Dex) like Uniswap. These Dexs are entirely peer-to-peer without any company or institution in control of the platform.

Some DeFi services include the following

  • Borrow and lend cryptos to earn interest on several platforms.
  • Creation of exchange derivatives of real-world assets like currencies or precious metals.
  • Be part of a no-loss lottery on Pool Together where participants get back all their money, and one lucky winner wins all the interest accrued in a shared pot.
  • You can buy special kinds of cryptocurrencies known as stable coins pegged to the value of a particular currency or commodity. Some examples include DAI, USDC, Tether, which are all pegged against the US dollar.

Defi is often referred to as “Lego money” because you can accumulate dApps together to maximize your returns. For instance, you can decide to buy DAI and then lend it out on Compounds try to earn returns, all using your mobile phone. Although most of the apps available today are niche, there is a possibility that future applications could have a big impact on our day-to-day life. In the future, you can purchase land or a house on a Defi platform under a mortgage agreement and then repay the price over a period of years. This transaction’s deeds would be put up in a tokenized form on a blockchain ledger as collateral. If you default on the loan repayment, the deeds will automatically shift to the lender. Since there is no need for lawyers or banks, the process will be fast and cheap.


Why Defi has Soared In Its Adoption

There are lots of things that have worked in favour of Defi applications. For example, in traditional unsecured lending, there is a legal requirement that both parties know each other’s identity and that the lender assesses the borrower’s capacity to repay the debt. In Defi, such requirements do not exist; instead, everything is hinged on mutual trust and privacy preservation. Regulators are contemplating between stifling innovation and failing to protect society from the potential risks of individuals investing their money into unregulated space. However, it seems that embracing change is the best thing to do at this point. In July, The United States Securities and Exchange Commission (SEC) took a major decision in embracing Defi when they approved Arca, an Ethereum-based fund, for the first time. This decision is a great one, especially because a hostile environment is one of the major challenges of financial innovation. In 2018, Basis, a New Jersey Defi project, returned $133 million to investors when it concluded that it couldn’t work within the SEC rules at that time.

Another major reason for the surge in Defi is the increasing involvement of mainstream players. More street-financial institutions are accepting Defi and are seeking ways to be part of it. Today we have about 75% of the world’s biggest banks trialling blockchain technology to speed up payments as part of the Interbank Information Network, spearheaded by JP Morgan, ANZ, and Royal Bank of Canada.


The truth is that we are heading towards a new financial dispensation with a new financial system that is more liberalized and decentralized. However, the best question is how to best guide this innovation to minimize while expanding on the benefits. This will undoubtedly be a challenge for the next few years.

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