Decentralized finance (DeFi) is exciting. For the first time in more than a century, we are witnessing the birth of an entirely new industry with the power to create wealth for billions of people. More than that, though, DeFi has the potential to be truly revolutionary: to replace banks and other actors of traditional finance with services that finally serve and act in the interests of ordinary people, not just institutions.
With its numerous platforms and projects that offer users across the globe interest rates not seen at banks for decades as well as lending, borrowing, margin trading and investing, DeFi has laid the groundwork for cryptocurrency to finally realize its founding principles: universal access to a financial system uncorrupted by corporations and governments.
Democratic, transparent DeFi
The DeFi platforms, protocols and applications that have emerged since 2015 are the beginning of this grand experiment in democratized finance. Decentralized exchanges run entirely on smart contracts that govern automated liquidity pools have paved the way for a new financial system based on a transparent blockchain network.
Of course, as these alternatives to the traditional financial ecosystem grow and develop, many platforms and DeFi applications are experiencing growing pains, with vulnerabilities in the smart contracts that underpin them, leading to issues such as costly ‘flash loan’ exploits. DeFi is still in its infancy, and it is not — like any new technology — without incident or risks.
DeFi platforms push innovation
We are, effectively, in a $14 billion sandbox in which solutions and new use cases are being found on an almost daily basis. This includes interest rate mining, hedge funds that allow users to choose asset managers to pool their funds with, ETFs that can use DeFi architecture to finally rival traditional models, and mergers and acquisitions between firms only months old that could open cryptocurrency and DeFi to pension funds.
The financial services that could come from DeFi platforms and protocols, and the use of the smart contract to widen access to financial products, are numerous. The possibilities range from borderless banking services for the world’s 1.7 billion unbanked citizens who can finally utilize the power of compound interest to generate wealth and income, to p2p lending for micro-businesses who are otherwise starved of lenders. (Check out YIELD App Co-founder and CEO Tim Frost’s latest for CoinTelegraph for more about reaching the global unbanked.)
Pioneers for a new age
We might, perhaps, see the current situation in DeFi as analogous to the early days of capitalism, when industry leaders like Henry Ford, John D. Rockefeller and J.P. Morgan redefined business and trade. While some practices were morally questionable, this period led to a surge in wealth and standards of living for millions as the greatest excesses of the era brought about changes that benefitted ordinary people.
Of course, traditional economies have strayed quite far from these pioneering days. Since the 1980s, reckless expansion of financial markets has led to numerous crashes that have returned the developed world to an almost feudal system. Today, elite institutions fund themselves by printing endless money that devalues fiat currencies and suppresses wage growth, exponentially shrinking the wealth and buying power of the greater masses.
Conversation and collaboration
DeFi has the potential to change all that. The ecosystem could not exist without its users and, unlike traditional finance, it is giving people the power to be their own bank. Many of the projects emerging across DeFi are, unquestionably, creating overnight millionaires of some founders, smart contract and app developers. There are numerous others, however, who are making little profit from the technology they give to the world, focussing instead on the user experience and development of DeFi above all else.
The risk inherent in DeFi also continues to be mitigated through the involvement of users. Unlike traditional finance, there is a constant conversation between developers and end-users that propels the evolution of the protocols. The YIELD App Telegram community, for example, has over 6,000 members that are regularly consulted through frequent AMAs and discussions, while the YLD token — set to launch on December 14th— rewards users with higher APY and daily rewards. This stands in stark contrast to the workings of J.P. Morgan and the likes.
Free, fair and future focussed
Those focussing on negative incidents and throwing around terms like ‘scam’ are missing the wider point. What we are witnessing in this new market is transformational. DeFi is attracting the best and brightest of global talent across FinTech and software development, leading to innovations few could have imagined a little over ten years ago when Bitcoin was nothing more than a developer’s fantasy.
Those in power tend not to want to give that power up. As such, DeFi and cryptocurrency will keep suffering the slings and arrows of global banks, asset managers and governments not interested in rectifying the social contracts they have broken. Regardless, DeFi will continue to evolve at its current breakneck speed: more than $13 billion of total value locked absorbed in less than a year is a strong indicator of the appetite that exists for a fairer financial future.