The finance industry has experienced a seismic shift in the last couple of years. We are seeing how the traditional finance model, although still very much prevalent, is experiencing quite a disruption with the rise of Decentralized Finance (DeFi). DeFi has emerged as a powerful alternative to the centralized control of banks and financial institutions. Powered by blockchain technology, DeFi provides lending, borrowing, and investment services for digital assets without the need for a conventional facilitator—which is the practice in the traditional finance industry.
In this article, we will move through the exciting world of DeFi, some of its applications, and how it's shaping the future of finance.
The Power of Decentralization
The Traditional Finance (TradFi) system is thought of as centralized because it is run by organizations and governing bodies that manage banking services, including lending and trading. Customers and consumers go through several intermediaries to access financial services as simple as home loans and as sophisticated as bonds. DeFi is disrupting this. The core tenet of DeFi is the concept of decentralization. The picture this paints is a financial system without intermediaries and gatekeepers. A system that gives individuals complete control over their assets. This painting is brought to life by blockchain technology with its core principles of transparency and immutability.
DeFi runs on a peer-to-peer dynamic. Individuals can access everyday financial services like loans, asset trading, mortgages, and complex contracts. These transactions carried out between peers are recorded on a public ledger (re: blockchain), and they are accessible to everyone, completely erasing the need for intermediaries. This potential to transform the financial sector and its systems with a significant increase in transparency, accessibility, and security has seen impressive growth in DeFi in a short time. At the time of writing, the total value locked in DeFi stands at around $99.30 billion, demonstrating its rapid growth and potential to disrupt traditional finance.
Unlocking Opportunities with DeFi Tools
DeFi provides a variety of opportunities for businesses and investors. With DeFi, companies can gain access to global markets without needing to go through intermediaries. This lowers the cost and increases efficiency, creating new economic opportunities. According to a World Bank publication in 2021, about 1.7 billion people worldwide cannot access the financial system. These people are unbanked. There's been improvement in financial inclusion as previously unbanked people are gaining access to financial services. Most of these people now have access to DeFi platforms like Unibit and BRC20X. The former helps users move their valuable Bitcoin-based assets effortlessly into the vibrant DeFi ecosystem, unlocking a world of decentralized finance opportunities previously inaccessible. The latter offers DeFi tools & services in the BRC-20 blockchain (a popular standard for tokens on the Bitcoin network) and beyond, focusing on helping and improving the Bitcoin user's journey.
Because DeFi automates processes by eliminating the middleman, it reduces the cost of transactions. This results in lower user fees and an increased level of efficiency in business. Transparency also facilitates this efficiency. The risk of fraud reduces as all transactions are recorded on the blockchain and this increases trust in the system. Decentralized Exchanges (DEXs) provide access to trading cryptocurrencies without needing intermediaries. These exchanges are non-custodial, which means that users have full ownership of their assets and aren't required to store them on the exchange. It is this proposition that is attracting more users, with the number of users expected to reach 22.09 million by 2028, and user penetration to hit 0.28% in that time.
Earning Through DeFi
The DeFi industry is in its nascent stages, and because of this, this period has seen use cases and innovations churned out regularly. These use cases open up new ways for DeFi investors to earn passive income. Some of these passive income means include DeFi staking, DeFi lending and borrowing, and DeFi yield farming. With staking, you commit your DeFi asset as a resource to confirm and execute transactions over the proof-of-stake (PoS) consensus mechanism. With lending, you can lend your assets to borrowers and receive interest on payment. You can also borrow assets by putting up your tokens as collateral. Yield farming uses the highest yield opportunities between different DeFi protocols. You provide liquidity, lend, or borrow across DeFi platforms to enable you to earn interest on your tokens. An example of a yield farming platform is Libera, a multi-chain high Annual Percentage Rate (APR) farming platform with a hyper deflationary mechanism. With yield farming, it is necessary to be cautious and well-informed as high APRs often come with increased risk, so responsible research is crucial.
DeFi Access For Everyone
One of the biggest challenges facing DeFi is accessibility. The complex user interfaces and the fragmented nature of the blockchain industry (multiple blockchains not seamlessly interacting) can be intimidating for newcomers. In addition to this, scalability issues affect the speed of transactions. The ability to support high transaction throughput cannot be overstated as it is an essential aspect of the growth of the blockchain.
Layer-1 solutions are doing a good job of fixing this problem. Dubbed on-chain scaling solutions because they require changes in the code based on the blockchain network, they focus on improving the block size limit or reducing verification time. Self Chain is a popular layer-1 platform doing this. It is a user-friendly Modular Intent-Centric Access Layer-1 blockchain and keyless wallet infrastructure service using MPC-TSS/AA for multi-chain Web3 access. It simplifies the DeFi process and allows everyone to participate in the revolution.
Combining DeFi with Artificial Intelligence (AI)
DeFi and AI are two exciting niches shaping the future of the crypto industry. We are seeing a lot of financial opportunities and inclusivity because of the combination of the principles of DeFi and the power of AI. It is a game-changing synergy that is driving the evolution of the DeFi industry. A major use case of AI in DeFi is in trading and asset management. AI-backed tools analyze data related to price, identify market trends, and make trading decisions based on the analyzed data. With this, emotions and bias are thrown out of the window and rational and efficient trading takes the front seat.
According to a report by Grand View Research, the global artificial intelligence in fintech market size valued at $9.45 billion in 2021 is expected to reach $41.16 billion by 2030, growing at a CAGR of 16.5% from 2022 to 2030. AI automates trading processes, which enables continuous trading and helps traders be early to great opportunities in the fast-paced cryptocurrency markets. Some of the advantages DeFi platforms powered by AI offer include:
Expanding market reach and research
Improved trading capability
Strategic vision for the long-term
Liquidity management
Access to advanced predictive model
Apart from DeFi, AI can be adapted to other niches in the blockchain industry as seen with YOUR AI Protocol in the e-commerce sphere. YOUR AI is the world’s first open-source protocol that brings creators, curators, node operators, and content distributors together to collectively provide AI-driven product content in e-commerce markets.
DeFi and Healthcare
DeFi applied to the healthcare industry disrupts with great impact. In 2018, the global size of the healthcare market was worth over $8.45 trillion. A number that has continued to grow. Medicine went digital with the onset of the Covid-19 global pandemic, and it has evolved in ways since then. Web3 and DeFi have taken root in the health industry, especially in the fitness and well-being niche. We've seen numerous projects offer blockchain-based health solutions, and Aniborgs is the latest one. It is a Web3 Move2Earn health app that combines fitness and fantasy. Users can acquire exclusive NFT characters and earn rewards as they prioritize their well-being.
Conclusion: The Future of Finance is Decentralized
The potential of the DeFi industry is undeniable even as it is still in its nascent stages. The niches and projects mentioned in this article represent just a glimpse into an emerging exciting ecosystem. What they prove is DeFi's ability to empower individuals, democratize finance, and create a more transparent and inclusive financial system. As the technology continues to mature with the emergence of user-friendly solutions, DeFi has shown that it has the potential to reshape how we interact with money.