Remember the 2017 crypto and ICO boom? The next big thing promises to be decentralised finance also known as DeFi.
What is DeFi?
The DeFi concept represents a paradigm shift from the incumbent economic and financial system, whose governance is highly centralised and controlled by authorities. Decentralised finance is about empowering users, promoting self-sovereignty and opening up financial institutions for individuals through technology.
One of this movement’s main enablers has been blockchain, the now mainstream distributed ledger technology (DLT) that keeps on challenging traditional finance and providing new solutions. Innovators are betting on the new trend with more than $4 billion in assets locked up in DeFi projects, and capital investment flowing to the sector.
The DeFi movement leverages blockchain to reinvent the financial system, using Ethereum-based smart contracts and removing the intermediary actors that have traditionally made finance and investment prohibitive for many. The DeFi system is open to all and not reliant on central authorities to make decisions regarding the terms of a service, such as interest rates, which are currently at a record low. It lowers the barrier of entry for those who — for a number of reasons — may not be able to access traditional bank accounts or borrowing.
Much like blockchain itself, DeFi solutions have several applications, which include credit lines and lending, financial data management, insurance provision, trading and asset management. Right from its inception, blockchain was designed to provide a transparent and accessible system; DeFi builds on this concept aiming to create a financial system that is universal and fully decentralised.
Cryptocurrencies and digital assets have been growing in popularity over the last few years. Bitcoin and similar were once viewed with scepticism. However, the crypto market is becoming increasingly strong and robust and is gradually gaining mainstream acceptance. The FT recently reported on the crypto fund managers’ ‘rampant bitcoin’, stating that crypto fund managers saw a more than 50 percent return in the seven months of this year; an outstanding result compared with the “low single-digit gains that hedge funds generated across traditional classes of assets”.
Disillusionment with traditional finance
The growing disillusionment with traditional finance has become even more evident in recent months as governments and central banks have attempted to mitigate the economic damage caused by the pandemic and associated weeks of lockdown.
Clem Chambers, CEO of leading global financial news platform ADVFN and one of the most revered personalities in the investment community, has written about the booming DeFi sector for Forbes. He argues that these new technologies represent a way out of the current economic crisis: “The world will have to go ‘risk on’ to recover and the winner of those races will undoubtedly grab onto the fastest and most dramatic technologies to try to drag themselves from the quicksand of economic depression. DeFi and crypto will undoubtedly be part of that and in the world that now talks in trillions of dollars, these developments will be hugely valuable.”
Clem Chambers and ADVFN’s sister company Online Blockchain plc (OBC) is betting on cryptocurrency and blockchain potential to unlock the new phase of finance. Chambers has frequently written about the Bitcoin price surge and his belief is that it could eventually reach $1,000,000 — not because of cryptocurrency valuation, but because traditional forms of money will fall and become ineffective in the economy. Since 2017, OBC has researched and developed numerous applications of blockchain and cryptocurrencies.
The US dollar is performing poorly, slipping to its lowest level in two years; all the while, the Bitcoin price has been surging, reaching US$12,000, prompted by growing demand that reflects an increased interest in alternative finance.
The DeFi future
The big players in the crypto market are already gearing up for the growth in DeFi, including Binance, one of the largest crypto exchanges. Binance has recently launched a DeFi staking program that gives users the chance to earn stake rewards, similar to interest, on a selection of digital assets.
Catherine Coley, CEO of Binance US, believes that this is just the beginning of decentralised finance becoming the norm: “It is exciting to see protocols deliver and drive new use cases for digital assets. Much like the internet gave us rapid iterations of improvements on mail and messaging, shopping, media, and advertising, we will also see digital assets modifying and advancing traditional financial products at an increasingly impressive speed. At Binance US, we are working around the clock to give our users access to these industry advances.”
Multiple possibilities are set to arise from this opening up of finance and economic governance. The industry may still be in its infancy, but innovations are sure to bring about promising new services.
The crypto world can seem daunting to beginners but there is much potential to be unleashed once these technologies become mainstream.
We are planning a series of video interviews with key personalities in the space so you can get key insights and solid information.
DeFi is a new and evolving concept. Let us know your questions about the topic. Contact us via social media or at [email protected].
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