What Makes Decentralised Finance A Hot Crypto Trend??

Wednesday, 7 July 2021, 1:43 pm
Article: Kalkine

For the past twelve months, the cryptocurrency space has been stealing almost every headline to become the latest buzz. Along with the popular crypto asset Bitcoin, several other digital coins have been gaining ground in developers rush to create digital cash that can gain a foothold in mainstream finance and commerce.

While the frontline cryptos, like Bitcoin, Dogecoin and Ethereum, have primarily been in the news for their erratic price moves, there is much more happening at the backdrop of these digital currencies that is largely shaping up the future of the financial world. We are referring to revolutionary technologies driving the cryptocurrency network.

One such technology is DeFi or Decentralised Finance, which seems to be strengthening itself as an ideal product-market fit for public blockchains. For the uninitiated, DeFi is a comprehensive, peer-to-peer system of storing and transferring assets without the restriction, structure, and costs of a conventional centralised banking system. Typically, people access DeFi platforms via decentralised apps, most of which function on the Ethereum network.

The burgeoning interest in DeFi applications is believed to have contributed to this year’s increase in the price of Ethereum, which is the second-largest cryptocurrency by market value after Bitcoin. Up from less than US$200 a year ago, Ether hit a record value of US$4,383 in May.

Must Read: What is Ethereum and how to buy it?

DeFi Transforming the Financial System

DeFi is essentially trying to recreate the entire banking system on a global scale. The goal of Defi is to provide decentralised control over financial transactions by providing open-source financial services building blocks. The current financial system lacks decentralised control, with regulators, authorities and governments playing an instrumental role in verifying and facilitating almost all financial transactions.

DeFi also ensures fast block times and cheap transaction costs, maximising value to the user. In this contemporary world, hundreds of millions of people still do not have access to a bank account. Moreover, even those who have a bank account encounter high-cost transactions and financing via credit cards and unjustified late fee payments. On top of that, the commission charged by an intermediary to facilitate a sales transaction of a business makes financial transactions quite expensive for users.

Now imagine accepting payments from customers without the role of any intermediary in between or securing a loan from other sources despite being rejected by a commercial bank. Such structural changes are possible with Defi.

Stringent eligibility criteria of traditional financial institutions exclude many borrowers from accessing required loans and funds and demand hefty guarantees in the form of collateral. DeFi allows borrowers to directly access funds from one or more investors, with a smart contract defining and monitoring the loan. Meanwhile, DeFi also enables cryptocurrency lending while allowing the lender to earn interest on his lent out cryptos.

While replacing legacy, Defi lending platforms can work as a catalyst for the smooth and fast-paced flow of funds across the globe. With the additional flow of investments, DeFi indirectly helps boost the economic growth by eliminating the bottlenecks of a traditional financial system.

These Challenges Demand Attention

While the scope of DeFi in transforming the conventional financial system is pretty good, one cannot neglect that DeFi is still a precarious and immature market. In certain instances, those running the DeFi applications are anonymous, making it difficult for users to ascertain which platforms are reliable. Besides, there is no recourse if a DeFi platform fails, given that its services are not regulated or insured.

At the same time, the risk of losing security cannot be overlooked. With a considerable amount of money pouring into this space, DeFi platforms have become increasingly attractive to hackers. If a DeFi service is not sound, the code behind the same can be exploited, leading to money being funnelled out. For instance, in April this year, a DeFi Polygon Network-powered protocol EasyFi suffered a massive hack that saw over US$60 million in funds stolen.

With DeFi still in its nascent stage, a lot of friction is expected to be seen from regulators against its mainstream use. The sustainable future of DeFi calls for the discovery of new solutions to tackle its inherent problems via cost-efficient, secure, and scalable transactions directly performed on the consensus layer of the blockchain.

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