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Is DeFi signalling the great financial evolution?
Thu, 10th Feb 2022
FYI, this story is more than a year old

DeFi defined

De-centralised Finance (DeFi), in general terms, is a concept emerging from blockchain utility, which uses de-centralised ledgers of information to remove any prior reliance on central banking authorities. Operating through its own dedicated and de-centralised community of processors, a blockchain DeFi project provides immutable security and fast transaction ability to its network of users.

By ‘removing the middlemen', DeFi protocols confer a higher degree of efficiency when it comes to transacting value. DeFi also confers greater transparency for financial transacting and holds the potential to enable greater access to financial services amongst the 1.7 billion people without bank accounts.

Anonymity, regulation and risks

As a relatively nascent technology, blockchain ledgers have raised questions as to whether the anonymity it provides would serve only to attract illegal activity. Similarly, a DeFi protocol would also present as a platform through which dubious financing could be carried out without a central authority to vet against it.

DeFi protocols have seen a rapid uptake among cryptocurrency investors and enthusiasts as an exciting and novel idea. However, this interest has garnered just as much attention from market regulators, especially in the case of national bans on cryptocurrency trading, as seen within countries like India and China.

Transactional transparency

Apart from the issues of security and legal compliance, issuers and lenders within traditional finance have yet to embrace and leverage the many objective benefits brought about by blockchain ledger technologies.

Among such benefits include providing a marked degree of transparency and efficiency compared to traditional finance methods. To dig into this concept deeper, DeFi removes the need for intermediary processing, which otherwise focuses on tasks like background checks, application vetting and other anti-laundering procedures.

Instead of requiring final approval from loan managers and bank employees, any similar transaction occurring on a DeFi protocol will simply be validated by authorised nodes on its network.

This ability to maintain transparency through its network has been touted by some as the ‘ideal solution' to ensure regulatory malpractice can be rooted out — thus preventing market calamities like the 2008 global financial crisis from happening.

A revolutionary new frontier

DeFi presents a revolutionary new frontier for opening fresh opportunities in improving the global finance markets. From a utility perspective, its technology alone presents improved speed and security to facilitate financial transactions — internationally. Moreover, this use case alone is a highly-developed feature that sees constant pursuit of uptake and improvement by popular cryptocurrency projects such as Stellar (XLMUSD).

Additionally, DeFi sets a fascinating new precedent for enabling access to financial services. While bank accounts are the expected norm within most developed societies, the World Bank estimates that up to 1.7 billion people in the world do not have access to an account of their own.

As a result, the emergent term within discussions around DeFi sees its examples championed by those in favour of enabling access among users who don't transact via traditional bank accounts, now commonly referred to as the ‘unbanked'.

As the concept continues to evolve, the question of how DeFi can be regulated will no doubt continue to be a pressing topic globally. A key example of how this conversation is taking place is in the current World Economic Forum's digital currency governance consortium.

While such a growing call to regulate and integrate this new technology into existing financial practices might dampen the red hot interest many enthusiasts keep for DeFi projects, it could also stand to provide a greater outcome as it enables greater global access to basic financial services.

DeFi: the great banking disruptor?

The numbers don't lie. According to a detailed report, the leading accounting firm recognised growth in DeFi from just under US $1 billion in June 2020 to over US $98 billion in September 2021.

Among the projects that continue to enable such staggering growth are crypto derivatives trading and yield farming platforms. These allow users to pursue profitable gains either through active market trading or by passively ‘staking' the value of their tokens to earn interest over a term.

It's no wonder there is such increasing interest in the DeFi space by regulators such as EY and the attention that it is gaining among institutional bodies globally.