DeFi: The Ultimate Global Disruptor?

March 7, 2022

Without a doubt, financial investment is a subject that commands close attention to detail, knowledge and experience, especially around rising security concerns.

Fraud and scams are high on the radar of many investors, and 83% of online stock traders have growing concerns about the future of the market (Source: Grow Acorns). With cybersecurity threats arising daily and increasing barriers to entry for interested blockchain traders, it’s no wonder that a platform was developed to replace traditional finance systems while promising its users a safer experience.

Its name? Decentralized Finance.

(Source: BAP Software)

When the term “DeFi” was coined in August 2018, developers led a global shift across the blockchain market, and the wider financial sector itself. Now, technical experts like EY predict that “decentralized finance could be one of the most impactful developments in the emerging digital economy.”

What is DeFi?

DeFi (or Decentralised Finance) is a blockchain technology platform that facilitates online transactions between several parties. The original purpose of DeFi was to create an open and secure financial system that grants unrestricted access to millions of users across the world, reducing the necessity for the “middle man” to take out loans or make financial blockchain investments.  

What are the Uses of DeFi?

DeFi is making headlines for its efficient lending and borrowing and is especially favoured by blockchain Ethereum investors. Yahoo Finance recently reported that DeFi Ethereum has over 4 million active members, all trading cryptocurrency and storing digital assets on the platform - technology way beyond what was previously possible with banking transactions.

International users across the world strongly vouch for DeFi, and its growth has been incredible. Wharton calculated that “digital assets locked into DeFi services grew from less than $1 billion in 2019 to over $15 billion at the end of 2020, and over $80 billion in May 2021”. As a result, DeFi has already been labelled as the “future” of finance by news sites like Forbes and finance experts like CoinCulture.

DeFi truly has disrupted the finance structures we already have in place and changed the global market of investment forever.

How is DeFi Different from Current Finance Systems?

DeFi allows users to diversify their investments with no surprises, promoting decentralisation that eliminates:

  1. Hefty fees for using banking services.
  2. A lack of transparent transactions.
  3. Barriers to entry for investors (such as credit score checks).

Its open platform and high system transparency not only makes cryptocurrency transactions more efficient, but also offers higher chances of loans and insurance to users (Source: Business Insider). Other advantages of DeFi compared to traditional finance includes the peer-to-peer currency movement, and open networks that transcend geographical borders - allowing a global movement of finances.

How DeFi Has Disrupted the Global Finance Market

DeFi Drives Finance Innovation

In an early 2022 article, expert Kevin Werbach of Wharton Business School was quizzed about his beliefs on how DeFi would drive innovation in finance activity, quoting:

“Right now, there is a tremendous amount of experimentation in DeFi because these base functions in finance can be combined in different ways. So one area of experimentation we see are aggregators - where if, for example, you have multiple opportunities to earn yields for providing capital as liquidity, then that can be automated and optimised in very efficient ways.”

As traditional financial institutes look to compete with DeFi, we may see more substitutes entering the market - granting investors and digital asset storers freedom of choice.

DeFi Grows FinTech

DeFi allows financial investors to “program money like software” (Source: Forbes) and is contributing to the advancement in the FinTech industry.

Before, FinTech development largely evolved around supporting financial institutions rather than replacing them, but as blockchain technology grows, so does the future of investment.

DeFi Becomes the “Next Big Threat to the Finance Sector”

Decentralised Finance is considered by some to pose a threat to the finance sector, as users move away from traditional loans to instead borrow from individuals. Banks and asset managers may be set to see a drop in demand as this alternative grows, drawing capital away from institutes that rely on interest rates to make profits.

For bank managers, owners, and shareholders, this creates a threat that needs to be addressed. They need to either adapt their services to compete with DeFi applications, or begin to offer new services through the platform. This would involve extensive digital and technical recruitment to hire blockchain specialists to both advise on and develop solutions.

(Source: McKinsey)

The Risks of Decentralised Finance

Though the positives seem unending for blockchain investors - there are still risks associated with the adoption of decentralised finance that could actually harm the global sector. These concerns revolve around:

It seems that DeFi will only continue to be successful as it is in its current state, and regulatory bodies moving to govern how crypto investment and finance transactions are generated will soon disrupt many of the benefits for users.

However, interference may be necessary.

DeFi has already become a target of money launderers and $33 billion dollars of cryptocurrency has already been stolen since 2017 (Source: Wall Street Journal). This is possible due to low-level background vetting conducted for both investors and borrowers - something that could pose huge threats to the blockchain industry.

DeFi: The Ultimate Global Disruptor?

Traditional finance institutions have been in operation for hundreds of years, and many have found their success growing investment channels and making loans. But, in a globalised world, banks are restricted to local government rules and have increasingly become a less-accessible platform for many investors.

On the other hand, the global blockchain market is growing at an annual CAGR of 67.3% (Source: Finances Online)  - setting the precedent for DeFi technology advancement in the future, and its control over the global finance market.

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