Slowly but surely, the world of decentralized finance (DeFi) has begun to radically transform the way in which borrowing/investing works today. In this regard, one need only take a look at the total volume locked (TVL) within this yet nascent space, a metric that has more than quadrupled since the start of the year, increasing from $25 billion to over $106 billion.
However, before proceeding any further, it would be useful for our readers to understand what the concept of DeFi entails exactly. In its most basic sense, decentralized finance can be thought of as an umbrella term for describing a system that enables a wide range of financial products to be made available to the masses via the use of a public decentralized blockchain network.
In other words, DeFi platforms are highly transparent ecosystems that completely bypass the need for any middlemen such as banking institutions, brokerage firms, etc and are open for use to anyone who may be interested. To be a bit more specific, contrary to how centralized financial institutions work — i.e. they require individuals to submit their government-issued IDs, social security numbers, or proof of address — DeFi protocols make it possible for buyers, sellers, lenders and borrowers to interact with one another directly.
Disrupting the Realm of Traditional Finance, One Day at a Time
Straight off the bat, it needs to be highlighted that, unlike traditional banking, decentralized finance offers users with streamlined access to a range of financial services all while eliminating any need to share one’s personal information or sensitive data. For example, in order to acquire a loan these days, applicants have to go through a system that is extremely bureaucratic in nature, resulting in an extremely long-drawn-out process that can often take weeks if not months to process.
On the other hand, acquiring a loan via a DeFi protocol is extremely straightforward, requiring users to simply undergo a few simple steps that too without them having to share any private particulars. Also, the loans are accessible from anywhere, i.e. the person does not have to physically be present at an office to finalize a deal, making the process not only more hasslefree but also quite affordable.
Furthermore, owing to the highly transparent nature of blockchain tech, all transaction data — such as loan issuance details, etc — being recorded is made available for everyone to see. This auditable nature of DeFi makes it possible for lenders to quite accurately assess the risks they may be undertaking as well as inspect the prospective portfolios of individuals looking to get make use of their services.
Lastly, as pointed out earlier, all DeFi-based lending/borrowing processes are conducted in a peer-to-peer fashion, which means that there is no scope for human error or third-party interference involved. This is made possible via the help of smart contracts that are able to function autonomously all while being able to analyze a host of different technical data — such as inspection of the loan sources involved, assessment of an individual’s credit levels — in real-time.
DeFi Will Change the Future of Investing
As more and more people start to understand the financial implications of what DeFi has to offer, it stands to reason that the sector will continue to expand and grow at a rapid pace, with more and more novel offerings making their way into the market. For example, Centrifuge is a platform designed to help SMEs (small and medium businesses) meet their financing needs, allowing them to connect directly with investors while cutting out any unnecessary intermediaries.
The model proposed by the firm is not only radically faster than what traditional banks offer but also way more cost-effective and rooted in a high level of transparency. If that wasn’t enough, the setup also allows investors to accrue a much higher rate of return on their capital as compared to traditional avenues such as savings bank accounts — that typically offer meager interest rates ranging between 0.2%-0.6% as compared to DeFi based platforms like Centrifuge which, on average, offer rates that are 10+ times higher.
As the DeFi market continues to receive an increasing amount of recognition from people across the globe, a growing list of mainstream entities are beginning to realize the technological, social and financial potential possessed by this fast-evolving technological domain. And even though this sector is still relatively young, there is no denying the fact that it has the power to completely disrupt the way in which the traditional banking system works.