The decentralized finance (DeFi) conversation started to pick up about a year ago. Today, we’re starting to see this once-fringe topic emerge as a mainstream conversation in fintech.
In fact, now that DeFi has become a reality, it’s not something that’s going away any time soon. The advent of cryptocurrencies enabled consumers to transfer money between parties without relying on a traditional bank. DeFi takes this power the next level.
These added capabilities are what have the potential to take cryptocurrencies from a speculative device to a useful tool. But while this is a reality for some, it is still a concept on paper for most. So why am I paying attention to DeFi now, while it’s still in its infancy?
It’s more than an idea
As mentioned above, DeFi has moved from the concept of “an interesting idea” into a concrete, value-added financial tool. Leveraging the power of smart contracts, DeFi allows users to lend, earn interest, and claim insurance. It can also be used to prove identity, assist with underwriting, AML and KYC compliance, and more.
Because of these capabilities, the use of DeFi is becoming more popular. The following graphic from DeFi Pulse shows the total U.S. dollar value locked in DeFi. The graph shows DeFi starting to take off in July of last year and rise exponentially. Today, the total locked value is more than $35.9 billion.
With this growth, we can expect to see more projects and use cases launch as DeFi emerges from an idea to a new reality.
DeFi will change banking as we know it
Today’s traditional banking system relies on centralized control. But one of the key aspects of DeFi is that it operates without an intermediary. That is, users can complete banking activities without a central governmental authority, a bank, or even a company setting rules, governing, and regulating activity.
Instead of this central control, DeFi leverages smart contracts that use “oracles,” or services that inform smart contracts of external data so that it can execute its purpose based on that data. As an example, a smart contract for flood insurance might rely on rain gauges to determine whether or not to pay out insurance claims to homeowners living in a certain area.
This key difference will change how consumers shop for financial services. Instead of hinging on trusting an institution, the consumer’s decision will rely on how smart they think the smart contract is, and whether or not they trust the oracles the smart contract uses.
It will transform the industry for the better
While DeFi is a little bit intimidating, it has the ability to change the financial world for the better. It is scalable and programmable, and is therefore well-suited for growth. In addition, it is immutable. That is, it is tamper-proof and cannot be changed or hacked. And transaction details are transparent; DeFi protocols are built with open source code and can be viewed by anyone.
The final, and perhaps most notable, aspect of DeFi is that it is permissionless. This means that anyone with a crypto wallet and an internet connection can participate in the DeFi economy. There is no minimum balance requirement and, because it doesn’t revolve around a central government, there are no geographic limitations.