An upcoming financial technology, decentralized finance (DeFi), poses a threat to the traditional banking system. By eliminating the need for third-party financial institutions like banks, DeFi encourages direct transactions between users.
Decentralized finance (DeFi) is the practice of conducting financial transactions (such as buying, selling, borrowing, and lending) directly among individuals rather than through intermediaries (such as banks, exchanges, or brokerages).
Moreover, DeFi represents a transition from relying on centralized institutions to relying on peer-to-peer networks that are based on shared pieces of code.
How Decentralized Finance Works
Financial applications and protocols based on programmable blockchain technologies like ethereum and solana are forming what is known as the “decentralised finance” ecosystem. Smart contracts on the blockchain automate the processing of transactions, including the formalization of agreements.
According to Stani Kulechov, creator of a DeFi protocol called Aave, “anyone can actually build businesses on top of these protocols and using them in the same way that we can today build an internet business on top of the HTTP IP protocol.”
Even though decentralized finance has only captured 5% of the crypto space, it has seen tremendous growth in the last few years, as reported by CoinGecko. As of June 2021, the total value of all DeFi assets in the cryptocurrency market was $93 billion, up from $4 billion three years prior. Certainly, DeFi’s expansion has slowed since the summer of 2020, and fears of crypto’s checkered past have increased the scrutiny of regulators on Capitol Hill.
Benefits of DeFi
There are many advantages to using DeFi instead of the Traditional Format (traditional finance, such as banks).
- Accessible to anyone with an Internet connection, crypto and blockchain technologies empower previously excluded groups in the financial sector.
Permissionless -Crypto networks allow users to communicate freely without needing authorization from any single authority.
Crypto networks are transparent because they use immutable, publicly accessible ledgers called blockchains to record all transactions.
Safe – When interacting with DeFi, you must use a non-custodial wallet, which means that you, not a third party, will hold custody of your private keys and cryptocurrency.
Bitcoin and other cryptocurrencies allow for much quicker transfers of funds than traditional bank transactions (which can take anywhere from three to five business days to clear).
Censorship resistance is built into the design of cryptocurrencies because they are transacted on decentralized networks and, therefore, immune to the control of a central authority. Users of cryptocurrencies can be shielded from scammers, tyrannical governments, and other threats in this way.
Using crypto smart contracts, programmable tasks that would normally require a human can be automated. This reduces the likelihood of human error while also creating new opportunities for financial products and services.
Also, know about other blockchain-related topics like web3 real estate solutions, real estate transactions using Blockchain, and many more.
DeFi Prediction 2023
Some of the most significant Defi Predictions for 2023 are listed below.
Centralized Exchange Failure
Several centralized exchanges (CEXs) have failed this year, with Sam Bankman-FTX Fried’s being the most prominent example. Many customers are wary of these platforms because of the lack of transparency and control they feel they have to reclaim their assets, which can take a long time and is fraught with uncertainty. DEXs, a key component of DeFi, stand to benefit greatly from this trend.
DEXs give users complete transparency and control, but their complexity and increased responsibility on the part of the average user can make them intimidating. Users don’t have to blindly trust a third party with their money because they can see exactly where and how their funds are being invested on the platform. As a result, 2023 may be a watershed year for DEXs, introducing even more ground-breaking features across various apps and platforms.
Modifying the Methodology of Financial Management to Be Less Concentrated. As a result, more and more financiers will understand how DeFi differs from its centralized analog. One factor is the convenience of claim reimbursements made possible by DeFi protocols. For instance, smart contracts were used exclusively by a few successful creditors to recoup their losses. When Celsius and Alameda Research repaid their loans, they were able to use the collateral they had posted to obtain the necessary funds for their operations.
Smart contracts employ cryptographic techniques to neutral and objectively mediate DeFi transactions. In contrast, in CeFi, the success or failure of a transaction is contingent on the judgment of a human intermediary and is, therefore, typically attributable to human error. Smart contracts, in contrast to FTX, don’t need third parties to mediate between the parties involved.
Increased DeFi/CeFi integration is likely as investors realize the potential of using smart contracts. For example, JPMorgan’s Onyx division has made significant progress in blockchain-based developments. In conjunction with the Monetary Authority of Singapore, the investment bank completed its first DeFi transaction this year.
The magnitude of the FTX crash has prompted calls for legislation that could hasten the widespread adoption of blockchain technology, and many people believe that this will happen. Therefore, the current CeFi infrastructure would allow institutions to interact with DeFi applications while maintaining compliance. JPMorgan and other banks have taken positive steps toward closer cooperation in the coming year.
DeFi will be pivotal in evolving digital identities, especially as CeFi explores additional ways to incorporate blockchain-based techniques. Soulbound tokens, ENS, POAPs, and Lens, are just some of the recent examples of tools that investigate the relationship between social networks, reputation, and decentralized identities. As a result, in 2023, we can expect a heightened emphasis on one’s identity and importance.
Non-fungible tokens (NFTs) and digital wallets, which have seen increased adoption in the past year, will help make this possible. To give just one example, this year saw the introduction of digital wallets by major social media platforms like Reddit, Instagram, and Twitter, raising public awareness of these services. There are about 80 million crypto wallets in existence as of November 2022, with about 6 percent of them interacting with DeFi. Next year, DeFi’s expansion will greatly aid the widespread adoption of digital wallets.
Meanwhile, NFTs will help establish decentralized identities in the DeFi by serving as unique identifiers. It’s possible, for instance, that in the future, participants in a decentralized exchange will add NFTs for assets to the pool of liquid assets that the exchange can trade. They could use the NFT as collateral to obtain cryptocurrency loans with which to purchase additional yield-generating assets.
Tokenizing licenses and academic credentials is another potential use case for NFTs beyond their direct application with DeFi. Off-chain attestations and credentials will also be required to be verifiable, with tools like MetaMask Snaps, DIDs, and VCs being used to create the first generation of such scalable reputation systems.