DeFi (Decentralized Finance) benefits have the potential to unlock financial abundance for all by providing access to better financial services to a larger and more diverse population. This is achieved through the use of blockchain technology which enables DeFi platforms to operate in a decentralized, transparent, and trustless manner. It involves eliminating intermediaries – and their costs – in a permissionless system that reduces barriers to entry. These benefits of decentralized finance apply to a wide range of products and services, such as lending and borrowing, trading, insurance and remittances, which are all available to anyone with an internet connection. Additionally, DeFi provides greater control over one’s own assets and financial data, leading to more financial freedom and empowerment. Let’s go deeper.
Here’s how DeFi can unlock financial abundance for all
DeFi platforms are open to anyone with an internet connection, regardless of their location, credit history, or income level. This opens up access to financial services and opportunities that were previously unavailable to many people, including those in remote areas.
DeFi eliminates intermediaries such as banks and financial institutions, reducing costs and increasing accessibility to financial services. The traditional institutions have shareholders who require dividends, a physical branch structure that requires maintenance, staff in the branches that require payment, and pension contributions to the staff that used to work for them. Eliminating such legacy costs from the equation can lead to greater financial returns for users, particularly for those in underbanked or unbanked communities.
Using DeFi, innovation can be broader and faster to implement. While traditional banks assess customers and their needs according to standard credit check procedures, newer service providers have innovated with measures that include using Uber drivers’ ratings as a factor when lending money for vehicle purchases. Decisions are reached faster and based on much wider criteria.
Working on decentralized networks means that DeFi users have greater control over their own assets and financial data. This can help to reduce the risk of fraud and financial crimes, as well as improve overall security. The governments of many major economies are not so keen on greater personal financial independence. The growing plans and rollout tests of central bank digital currencies (CBDCs) tend to underplay how they will increase governmental control over personal financial details and activities.
DeFi operates on open-source protocols, allowing for seamless integration and interoperability between different platforms. This allows for greater flexibility and choice for users, and can also drive innovation by encouraging collaboration between different DeFi projects.
DeFi benefits include smart contracts, which are computer programs or transaction protocols intended to automatically execute, control or document events and actions according to the terms of a contract or an agreement. They work through code written into a blockchain that executes the terms of an agreement or contract from outside the chain. A smart contract automates the actions that would otherwise be completed by the parties in the agreement, which removes the need for both parties to trust each other.
How DeFi has enhanced the financial services industry
Decentralized finance therefore has the potential to greatly improve and transform the traditional financial system through:
- Increased competition
- Cost reduction
- Greater accessibility
- Improved customer experience
- Increased transparency
- More rapid innovation
- Wider inclusivity
How DeFi works in practice
Yield farming is a DeFi concept where users provide liquidity to a decentralized exchange (DEX) or a lending protocol, in exchange for a yield in the form of tokens. By doing so, users can earn interest rates that are higher than those offered by traditional banks. This has unlocked financial abundance for users who can now earn passive income on their crypto holdings. Examples of yield farming protocols include Aave, Compound, and Curve.
Stablecoins are cryptocurrencies that are pegged to the value of a stable asset like the US dollar. Stablecoins provide a way for users to store and transfer value without the volatility associated with other cryptocurrencies. This has removed extreme risk for users who previously had to deal with the volatility of cryptocurrencies. Examples of stablecoins include USDT (aka Tether), USDC (USD Coin), and DAI.
Decentralized Exchanges (DEXs)
These are platforms that allow users to trade cryptocurrencies without the need for a centralized authority. DEXs provide users with more control over their assets and reduce the risk of hacks or fraud that is associated with centralized exchanges. This has unlocked financial abundance for users who can now trade cryptocurrencies without the need for a middleman. Examples of DEXs include Uniswap, SushiSwap, and PancakeSwap.
Non-fungible tokens (NFTs) are unique digital assets that are stored on a blockchain. NFTs have unlocked financial abundance for artists and creators who can now monetize their digital creations like art, music, and videos. NFTs have also created new opportunities for investors to invest in digital assets that have unique value propositions. Examples of NFT platforms include OpenSea, Rarible, and SuperRare.
Platforms such as Aave and Compound allow users to lend and borrow cryptocurrencies without the need for a centralized intermediary. This has unlocked financial abundance for users who can now borrow and lend crypto assets at more competitive rates compared to traditional lenders.
These are just a few examples of how DeFi’s benefits have unlocked financial abundance for many people in the past two years. As the DeFi ecosystem continues to evolve and innovate, we can expect to see even more financial opportunities and products that will empower users and communities around the world. It is a rapidly evolving space, and new and innovative financial products continue to drive competition and help to improve the overall quality of financial services available to users.