Decentralized Finance (Defi) growth has been explosive. In the last year, the value locked into Defi has increased 1500% to $8bn, according to Defi Pulse. As analysts question how disruptive it will be to traditional finance, Crypto.com and Boston Consulting Group (BCG), released a joint research report weighing the implications Defi will have on centralized finance.
Key points -:
- Decentralized finance, or Defi, aims to give users an alternative by removing the need to trust centralized parties. By removing the intermediary and automating many functions, Defi can provide lower costs, higher degrees of security and privacy, resist censorship, increase accessibility and promote a decision-making democracy.
- Centralized finance is ill-equipped to serve the under-banked sectors of the world, like SMEs and individuals in emerging economies. The World Bank believes this represents a $380bn opportunity.
- There are six critical improvements crucial for DeFi’s future growth and adoption: 1) blockchain throughput and high network fees, 2) currently limited liquidity, 3) security and smart contract risk, 4) the necessity of over-collateralization, 5) regulatory risk, and 6) consolidation of Defi protocols around a single network.
- There are three key areas where traditional finance will be impacted: payments, lending, and exchanges. Defi has the potential to result in significant cost savings for merchant and individual transactions over traditional financial services.
When thinking of the finance industry, fintech companies are the most innovative part of it. They have easy-to-use and sleek apps for better user interfaces which can be a troublesome challenge for the banking sector. But when it comes to the blockchain industry, innovative companies and their apps have been struggling to keep up with the growth of Defi. Earlier the blockchain spaces were treated as something that can be ignored but now these start-ups have grown powerful with crypto’s resurgence without engaging with Bitcoin until the beginning of 2021.
With the growing movement, fintech’s should understand why users want decentralized financial products. It is vital to know the reasons why users aren’t moving onto Aave. In most cases, it is because they are not aware of how to get onto Aave. Defi has various risks in terms of sudden volume shifts and market manipulation with the steady influx of liquidity. And so, developers have started to prioritize building strong protocols with good infrastructure rather than optimizing the user experience.
Giving access to Defi is easy, but figuring out how to become Defi credit when the landscape is changing is difficult. The users can hop in and out in Defi but apps are not so, they can be in demand this month and may not be the next since users jump in searching for new opportunities. The other problem could compound as users demand access to apps on other blockchains, requiring diverse integration teams. To tackle this, fintech should develop a future-proof approach to become Defi ready.
In this scenario, fintech can either become useful guides for its users as they enter Defi, or look for themselves behind their competitors since the transition to more decentralized financial products continues altogether.
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