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 The Evolution of DeFi And Potential Impact on the Global Financial System

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Evolution of DeFi

 The Evolution of DeFi And Potential Impact on the Global Financial System

The evolution of DeFi in decentralization offers scalability, interoperability, and access to networks beyond Ethereum. Evolution in the blockchain industry moves in waves, the same with most technical domains. The building of layer-one solutions and infrastructures like Bitcoin and Ethereum was the first wave. The second wave came with the Initial Coin Offering (ICO) boom. 

Evolution of DeFi

As the ICO boom draws to an end, industry experts have been speculating on the next wave in the crypto industry. Most predicted that security token offering and initial exchange offering would be the wave. Their predictions never saw the light of day. Others believed layer-two scaling solutions like the Lightning Network and Plasma would be the bang. However, these layer-two solutions have proven to be essential solutions due to high network congestion and Ethereum gas fees skyrocketing. These solutions are unfortunately, far from their desired function. 

Also read: Proof-of-Work VS Proof-of-Stake: The best for scaling blockchains 

Other solutions like Cosmos and Polkadot are also within the same category as the solutions listed above. However, they are great in the sense that they permit the free flow of liquidity between networks. They also help to address the issues of congestion. 

This brings us to the evolution of DeFi or decentralized finance. It came at the right time to cove for the total disappointment of ICO. More than 70% of the ICOs were scams, while most of the remaining projects failed to provide good substation value. Before we go further to explore the evolution of decentralized finance, let’s know what DeFi is.

What is Decentralized Finance (DeFi)?

DeFi is a variety of financial applications in the blockchain industry geared towards disrupting traditional financial intermediaries. Decentralized finance (DeFi) is unique because it expands blockchain from simple value transfer to more complex financial use cases. DeFi does not rely on central financial intermediaries like brokerages, exchanges, or banks. It utilizes blockchain technology and smart contract to execute its transactions. 

You may be asking why we need decentralized finance when we have cryptocurrency. Well, cryptocurrency still depends on centralized exchanges for their use, while DeFi adopts decentralized exchanges to eliminate centralized point-of-failure. DeFi’s unique solution offers synthetic products that allow conservative investors to receive interest on their stablecoins. It also enables traders and crypto enthusiasts to leverage their current position. 

Also read: Investing in DeFi: Why you should rely on diversification and not short-term returns

One of the many signs of the brilliance of decentralized finance is the issuance of governance tokens. These tokens democratize the governance of the network while also promoting true decentralization. This feature has made the evolution of DeFi, the purest decentralized organization at the moment. 

The Power of Decentralized Finance 

There is no doubt that DeFi is changing the financial services world through its applications’ composable infrastructure. Its functionality and consumer benefits are also essential to how DeFi is augmenting the global financial system. The DeFi project is tackling long-standing issues and solving the inefficiencies in our current financial system. It improves financial inclusion, reduces cost, and increases liquidity. 

Outside finance, there has been a growing interest in DeFi and its potential to improve existing systems. In the DeFi space, there is what we call “Composability” or “Money Legos.” It refers to how you can connect the ecosystem’s components to form new and more powerful and useful applications. A component of the DeFi ecosystem may allow you to deposit funds and accrue interest, while a second allows you to direct that interest to a non-profit of your choosing. 

Another great advantage of the evolution of Defi is financial inclusion. Most people don’t consider accessibility to traditional financial services as a problem. However, the Global Findex Database revealed that about 1.7 billion people lack access to basic financial services. DeFi democratizes banking services. The current traditional financial system makes it prohibitively expensive to send money across borders. Without expensive intermediaries, decentralized finance (DeFi) unlocks for reduced costs and better interest rates for across border transactions. 

Evolution of DeFi Gives People Greater Financial Control 

The solutions of DeFi are giving users greater financial control over their finances. DeFi protocols and applications enable greater transparency and openness, lowering the costs and barriers to entry. With the evolution of DeFi, we can expect further devolution of power to financial service consumers. This approach will undoubtedly facilitate greater autonomy and flexibility.   

There are varieties of DeFi savings apps, offering users a way to save their money and receive interests outside of traditional institutions. Financial banking services and peer-to-peer lending are some of the many applications that give users greater financial control. With the availability of instant cash settlement, the ability to use digital assets as collateral, and no credit check, DeFi platforms certainly have a lot of appeal over traditional financial systems. 

One other segment of DeFi applications is decentralized exchanges (DEXes). With DEXes, you can trade digital assets without needing an exchange to hold your funds. The smart contract enables direct trades between the participants’ wallets. Users may also enjoy lower trading fees on DEXes, unlike centralized exchanges considering their reduced overhead. 

The Security Challenges of DeFi

 It is obvious that the evolution of DeFi has come with promising potential, but security challenges remain. Over the last few months, hackers have made away with at least $27 million from DeFi projects. In June this year, Balancer, a DeFi liquidity provider, experienced a sophisticated hack. The hacker tricked the protocol into releasing its tokens worth about $500 000. In another security breach, hackers stole $25 million worth of Bitcoin and Ethereum from dForce’s lending protocol (Lend.Me) through a re-entry attack. 

Read: What is Lightning Network and how does it work

Conclusion 

The evolution of DeFi and its integration into traditional financial services can drive innovation globally. DeFi’s potential to change the global financial system is undeniable, but tackling its security challenges is critical for continued expansion. The introduction of smart contract insurance is beginning to play a major role in the DeFi sector. Using insurance to reduce risks for users will make both developers and DeFi users to feel more secure and confident. The use of stablecoins is likely to continue growing. Hence, helping to drive mainstream adoption and also changing the way we engage in a transaction. As DeFi creates a better and more accessible financial system, the services controlled by banks and financial systems will start shifting. Although every new technology comes with its challenges, it will be exciting to see the creative and innovative ways we can use DeFi to improve the global financial system.  

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