How can Decentralized Finance(DeFi) power the new financial revolution?
Decentralized Finance(DeFi), also known as Open Finance, is a response to the frailty and failures in traditional finance. Powered by distributed ledger technology, DeFi has kickstarted the paradigm shift towards the democratization of financial services. Despite its success, financial services have remained opaque, inaccessible to many and are replete of inefficiencies. Third-parties or intermediaries have increased the cost of financial services so much so that efforts towards ensuring financial inclusion are proving futile. DeFi is a brave attempt to turn traditional finance on its head by ushering in transparency, efficiency and accessibility. Financial services built on top of public blockchains and driven by smart contracts form the essence of decentralized finance. DeFi holds the promise of disrupting financial services the way the internet disrupted the news industry.
Core Philosophy of DeFi:
Decentralized finance services stay true to the core philosophy of accessibility, efficiency and transparency.
*Accessibility: Across the globe, more than 1.7 billion adults are bereft of financial services. Interestingly, two-thirds of the unbanked population have mobile phones. Anyone with an internet connection can get access to open finance services. Geographical boundaries do not matter. DeFi democratizes access to financial services by using public DLT.
*Efficiency: Smart contracts eliminate the need for third parties or intermediaries. Inefficient processes can be automated by using smart contracts, thereby making custodians and escrow agents redundant.
*Transparency: Decentralized finance services are designed on top of public blockchains, provenance and audit trail guarantee transparency.
DeFi is a new, open, peer to peer, transparent and immutable financial infrastructure. It empowers individuals to build innovative financial instruments using public blockchains. Smart contracts drive decentralized finance protocols and applications. Open finance is a giant leap towards the democratization of finance where new products or services can be built on top of public blockchains. DeFi is a giant leap towards initiating the process of democratization of finance where tech entrepreneurs, innovators can design new products or services on top of public blockchains.
DeFi Use Cases:
Lending : One of the most popular protocols of decentralized protocols is about lending. Decentralized lending and borrowing have multiple advantages vis a vis traditional lending systems. Real-time settlement and reduction of counterparty risk ensure cheap lending at faster rates.
Decentralized Marketplaces: Decentralized marketplaces or DEXes enable users to trade digital assets or virtual currencies without any intervention from a third party or intermediary. Trades are executed in a peer to peer fashion and facilitated by smart contracts. Decentralized exchanges have comparatively lower trading fees as compared to their centralized counterparts.
Capital Markets : DeFi offers a huge potential to propel decentralization of capital markets by way of tokenization of securities. Smart contracts
can be used to automate settlement and custody services.
Roadblocks to DeFi adoption: There is a shroud of regulatory uncertainty over decentralized finance. To foster an innovative ecosystem of financial services, regulators should come forward to collaborate and create standards for adoption of DeFi protocols. There are prominent UI/UX, user experience challenges as compared to traditional financial products and the onus is on the builders of DeFi products and services to factor in these aspects in their design thinking process. DeFi products should be designed to reduce the risk of user error.
DeFi is the future of finance and the first step towards creating an “open-finance” mass movement. A new financial world order devoid of intermediaries which promote inclusion and parity by using distributed ledger technology. With more than 1 billion USD locked in the DeFi market, industry stakeholders have started exploring pilot projects to accelerate adoption.