The financial system is on the verge of collapse, and there are no superheroes who can turn the tide in the real world. Therefore, we must learn how to rely on our own hands to protect the money we have earned. Currently, the best way is to store funds outside the traditional financial system. Decentralized finance, or DeFi for short, may become a killer application in the banking industry.
What exactly is DeFi?
This is an ecosystem of financial applications built on the blockchain (especially Ethereum), which can operate independently without the intervention of third parties or intermediaries. In 2020, the DeFi economy has grown by US$4 billion and is currently one of the fastest growing sectors in the financial sector.
The main problem with DeFi
Currently the only truly decentralized financial application is Bitcoin. Anyone with access to the Internet can store and transfer funds in a decentralized manner. But DeFi has made a further commitment: to introduce decentralization into the mainstream public view. This will provide a global and open alternative to all financial services including savings, loans, investment and insurance. Next, we will introduce three DeFi use cases that are sufficient to disrupt the traditional banking industry:
Stablecoin is the first DeFi use case to achieve a blowout development. The idea of ”a cryptocurrency free from the long-term instability of Bitcoin” is very attractive to many people. On the one hand, it has price stability similar to the US dollar or the euro; on the other hand, it also has the speed and convenience of cryptocurrency. The stablecoin perfectly combines the advantages of the two. Currently, about 80% of encrypted transactions are conducted through Tether stablecoin. At the same time, other companies, such as USDC, TruUSD, Dai or PAX, have also experienced explosive growth in the past year. Therefore, the stable currency market definitely deserves our continued attention and expectation. After all, most bank customers are tired of inefficient and expensive services and increasing government supervision.
2. Decentralized Exchanges
Decentralized exchange (DEX) is one of the most breakthrough innovations derived from DeFi. In recent years, the number of DEX has also shown explosive growth. According to data from Dune Analytics, monthly transaction volume in 2020 has grown to nearly $12 billion. So, what is DEX? The essence of DEX is a cryptocurrency platform, users’ assets can be traded without going through an exchange. Therefore, the risk of being stolen and attacked by hackers can be greatly reduced. Currently, the most popular DEX platforms are Curve, Balancer, 0x, Dydx, Kyber, Bancor, IDEX, Oasis and Gnosis Protocol. But in fact, the ultimate reason for attracting people to join DEX is the growing and more complex “know your-client process (KYC)” demand. It stripped the anonymity of customers and caused financial exclusion of more than 2.4 billion people. They are like cancer, engulfing the entire banking system alive.
3. Borrowing and Lending Applications
To say the most compelling development in the DeFi field, one has to mention decentralized lending platforms. The DeFi lending platform can provide loans to users or companies without any intermediaries. Anyone can deposit their available assets into the shared loan pool, and those who want to borrow can withdraw assets from the pool. Currently, the most popular DeFi loan platforms are Compound, Maker, Aave and dYdX. At the same time, companies such as Blockfi, Celsius, CRED, Nexo and Crypto.com also provide annual interest rates of up to 10%. The lending platform enhances the flexibility of banking business and removes strict threshold restrictions on the location, identity, and assets of customers. This use case is expected to lead DeFi into the mainstream market.
The form of DeFi insurance is still relatively conservative. It mainly acts as a safety net in the DeFi ecosystem. Users no longer need traditional banks or institutions to ensure the safety of their deposits. Although decentralized insurance is not popular in the entire DeFi community at present, it is likely to disrupt the entire insurance industry in the future. If you want to learn about insurance products other than traditional insurance companies, you can check out Nexus Mutual, Opyn, Etherisc and CDx.
Next, where are we going?
DeFi is an interesting idea with trillions of dollars in potential. If we compare DeFi with the traditional financial system, it is not difficult to find the fatal attraction in DeFi. As you can see, some DeFi projects have replaced part of the business in the centralized encryption economy, and it will not be long before it will begin to replace the traditional banking and insurance industries. Now, the financial system needs to be repaired-to make it more transparent, open and efficient. Otherwise, if we don’t properly wrap up this broken financial system, 20 years later, we will eventually pay for our stupidity at this moment.