4 Reasons Why DeFi is Revolutionizing the Finance Industry
Last Updated on November 13, 2023 by Ameer Hamza
It has been about 13 years since the first cryptocurrency was created. The concept, however, gained popularity only after 2011. As we were all getting accustomed to the technological transformations and remote working, through the pandemic, between December 2019 to 2020, the interest in cryptocurrency investments spiked to a new high. Considering the loss of employment, there was much promise in the crypto investment space, with more and more people opting for digital wallets and financial applications to grow their wealth in difficult times.
A 2020 review of the Crypto and Stock Market explained that the growth of DeFi has accelerated from US$700 million in December 2019 to US$13 billion in December 2020!
Decentralised Finance, or DeFi, is the trending method for asset management and financial transactions. DeFi, simply put, is a term used to talk about Financial Services on blockchain platforms such as Ethereum.
“There are countless different schools of thought about regulating decentralised finance. Some believe that regulating cryptocurrencies might provide more stability to the unpredictable market, therefore protecting investors. Others oppose increased regulation. They believe that introducing stricter controls would obstruct innovation and object to the essence of cryptocurrencies, which promote decentralisation at its core,” explained Ola J Lind, CSO Nasdaq Listed FTFT, CEO & Director FTFT Capital.
A study by Emergen explained that the global DeFi platforms market size is expected to reach a total of USD 507.92 Billion by 2028, showcasing a compound annual growth rate of 43.8%.
Many things are coming up as DeFi develops at a greater pace. Here are four reasons why DeFi is changing the processes of the finance Industry:
1. DeFi vs. Traditional Finance
Decentralised finance and traditional finance are similar in many ways. However, DeFi offers a lot more flexibility than conventional services. DeFi allows you to do the same thing as any bank but with much less hassle.
Decentralised financial services are known to be much faster than traditional banking services. The digital world is changing how businesses function in today’s world. According to an article by the World Economic Forum, the development of DeFi could open up numerous opportunities for big companies and hike up cash flow for small-to-medium enterprises.
Decentralised finance offers the same services as a bank with fewer barriers and lowers costs. The concept uses assets as collateral and smart contracts to make lending more effective and grows your finances with much higher interest rates than banks.
A few significant differences between DeFi and traditional finance include that DeFi enables you to be responsible for your own money, whereas, with conventional finance, the bank is accountable for everyone’s money. Secondly, DeFi highly focuses on transparency money users, unlike traditional banking, where decisions are made behind closed doors.
Nevertheless, it is important to remember that although DeFi offers more benefits, both industries are essential to building an in-depth and absolute ecosystem. Both approaches to finance are crucial to shaping the financial world.
The interest of consumers in DeFi investments has been steadily growing over the past two years. Statista published a study in July 2022 showing the increase of “Unique addresses that either bought or sold DeFi” showing just about 90,587 people in December 2019, growing to over 1,161,858 in December 2020. The research also revealed that as of July 2022, the number of DeFi users has reached a massive high of more than 4.8 million unique addresses currently buying or selling assets through decentralized finance.
2. No Third-Party Interference
Decentralised finances work on blockchain networks, fuelling decentralised apps, or dApps, that operate without any required downtime and risk potential fraud or interference from a third-party operator.
DeFi makes financial operations easier, considering that only you are in charge of where your money goes and when. You can control your assets based on your demands.
“Decentralized financing has the ability to potentially resolve some of the most critical problems in the banking and financial ecosystems, creating new levels of openness, trust, and scale, giving people full visibility and direct control over which projects they invest in and the value they receive,” said Jarrett Preston, Chief Executive Officer, Idoneus.
DeFi applications allow you to do most things banks can do for you. However, the pro here is – no third-party interference. For example, transactions on a DeFi platform occur through blockchain, going directly from the sender to the receiver within minutes. However, when it comes to banking, transactions in traditional banking take ‘3-5 working days’ since it goes from the sender to the sender’s bank through a payment platform (Visa, MasterCard, PayPal, etc.) to the receiver’s bank, after which it reaches the receiver.
3. Asset Management
Keeping in mind that DeFi enables you to take responsibility for your finances without any third-party interference, it is a given that you are in charge of managing your assets throughout your financial journey.
Users now experience transparency and control over their investment decisions compared to banking investments. The development of decentralised asset management has provided room for various opportunities depending on the individual’s financial needs. This has simultaneously also highlighted the importance of ease and flexibility when it comes to investing in virtual and tangible assets.
However, having the power to manage your assets and investments can also be a challenging step as an investor. One of the key challenges for investors, however, while managing their own assets, is to not get caught up in the hype. Digital currencies have worked their way through the portfolios of many investors. Analysts have warned crypto buyers about the fickle nature of the market. Before people look into investing in the DeFi market, as with any other investment, it’s important to do your research.
There are multiple aspects of DeFi that attract the eyes of consumers. In fact, Investopedia recently shared a study explaining that some of the main attractions of DeFi include the fact that it eliminates the hassle and any fees that banks or financial companies apply while providing their services. Moreover, consumers like the idea of holding their finances in a digital wallet and being able to use their money without the need for any third-party approval.
4. An Open, Accessible, and Fair Market
DeFi platforms, with the flexibility and control they provide for the user, are known to create a more open, accessible, and fair financial market for anyone and everyone with an internet connection.
Public interest in DeFi and crypto-assets like Bitcoin, Ethereum, and Idon are gaining new investors each day. Idoneus shared that an estimated 70% of new value created in the economy over the next decade will be based on digitally enhanced business models.
Several FinTech companies that provide DeFi and Blockchain services, such as DeFi Swap, Aqru, Sarwa, Zoco Coins, FTFT Capital, and so on, are gaining more and more popularity due to the transparent nature and agility of DeFi. People like being informed how their money is being used and prefer real-time updates on profit and loss margins from their investments.
“Today’s financial world is excited with the new and complex investment products coming up every other day in the market. Making the target market understand these to their fullest extent while ascertaining the client’s risk capacity should be the focus for all key stakeholders,” said Vijay Valecha, Chief Investment Officer, Century Financial.
Although centralised finance is an essential aspect of the financial ecosystem, it would be safe to say that decentralisation is the future of financial operations.