DeFi, the new frontier for cryptocurrency adoption: Risk and prospects
July 12, 2020
The Cryptocurrency space has since helped to deepen blockchain adoption in the mainstream, especially in the financial industry. It is employing several innovative measures to achieve its mainstream adoption purpose. Consequently, ICO and DeFi are some of the innovations. However, the ICO, a blockchain fundraising scheme called initial coin offering, set good precedence to Cryptocurrency adoption. Still, somehow it fazed out to DeFi, a decentralized alternative to the conventional financial system.
Before discussing in detail about DeFi, it is crucial to have a comparative look at ICOs and DeFis. Nonetheless, both innovations started from Ethereum blockchain, an open-source public and permissionless blockchain for dApps and Smart contracts, before spreading to other Blockchains. For instance, ICO is currently hosting on Stellar, EOS, among others, as well as DeFi developing on Cosmos, EOS, Bitcoin, and other ecosystems.
ICO started in early 2016, using a smart contract to solicit for funds from the crypto community. On the other hand, DeFi began in early 2018, intending to provide an alternative to conventional financial solutions while bringing real-life use cases to Cryptocurrency.
DeFi: the new face of cryptocurrency adoption.
DeFi is an acronym used for Decentralized Finance. It is typically an open finance movement that creates a financial system, open to everyone who wants to minimize the risk of trusting a central authority. Unlike the conventional financial systems where you need a third party to verify, give access to and regulate transactions, DeFi, uses smart contracts and other Blockchain functionalities to deliver an open, transparent, secured, and robust financial system. It leverages the Blockchain, the Internet, cryptography, among other technologies to serve you. Hence, it is the new face of FinTech and the new frontier for Cryptocurrency adoption. If you have a Cryptocurrency or digital assets, DeFi is for you. It enables you to manage, lend, and use your Cryptocurrency in any possible ways you deem fit.
In a DeFi ecosystem, smart contracts and dApps, together with other functionalities, make things easier for you. Primarily, smart contracts are a set of codes written to predetermine and execute transactions as agreed. More so,
DApps are generally referred to as Decentralized Applications, built across several nodes(computers) across the globe to serve users at different locations.
DeFi ecosystems and use cases
DeFi has varieties of use cases, and each of them seeks to provide security, anonymity, trade-ability, accessibility, etcetera. Below are some DeFi use cases you should know:
Using its decentralized model, DeFi is helping the banked and unbanked population to perfect cross border transactions. Recall the hurdles required in making cross-border payment? Each conversion costs money and time, but leveraging the blockchain simplifies the process for you. DeFi does not only reduce the time it takes, it makes it cheaper, transparent, and secured.
One of the fears of an average investor is volatility. However, it could be favourable or disfavourable. Consider the volatility of the last quarter of 2017, for instance, when bitcoin rose to approximately $20,000 but failed to stabilize in the preceding year, 2018. Every investor who invested or bought at that rate, subsequently, got burnt. Consequently, the stable coin, a product of DeFi, makes it safer for you to convert to backed currencies or assets as the need arises. Therefore, DeFi provides a more significant and less volatile market for cryptocurrency adopters. Examples include DAI, WBTC, Gemini Dollar, and etcetera.
Decentralized exchanges, Dex
A decentralized exchange is a peer to peer, automated exchange that needs no central authority or third part to regulate, and yet it is secured, transparent, and provides liquidity. It is one of the applications of DeFi in that it allows users to trade without a central party. Examples include but not limited to Binance Dex, Atomex, IDex, Bancor, Balancer, Voluto, and etcetera.
DeFi enables the crypto community to exchange values regardless of location. It does so through a decentralized market place for non-fungible tokens, called nifty. With the blockchain smart contract, users can exchange collectable values, cards, identities, and etcetera, on a decentralized system. Examples include Gitcoin, OpenBazar, LocalCryptos, and the rest.
The blockchain asset, tokenization principles, real assets, and other physical assets can increase liquidity when digitalized. The DeFi ecosystems create asset-backed tokens that enable owners and users to interact in a digitalized space. Examples are Tokensoft, OpenFinance, Securitize, and etcetera.
Collateralized and non-collateralized lending, borrowing, and saving
Using a decentralized model, users can save, borrow, and lend with or without collateral. The DeFi enables the platform to work, and it is built to check credit records, potential real-life assets in a democratized borrowing, and lending pools. For example, Compound, EOSREX, and the rest.
Decentralized Autonomous Organizations, DAO
A DAO is a fully democratized and decentralized community where users are nodes across space. Consequently, the DeFi creates and provides financial solutions in the DAOs. For instance, Colony, Aragon, among others.
Possible Risks in the DeFi
Despite the considerable attention the DeFi is getting, several challenges could limit the growth if care is not taken. Here are the most significant risks of DeFi:
DeFi represents Decentralized finance, yet a few third parties regulate it. Consequently, the DeFi distributed and the decentralized concept is in view and work-in-progress. Therefore, due to a few centralization issues in DeFi, it is manipulative. However, it opens the way for a fully decentralized Finance.
Security and hacks
Hacks are endemic to every online or internet-driven application, and DeFi is no exception. Cyber threats are the most significant risk to DeFi, as it is limiting users and investors to participate in the process. You often hear liquidity providers getting reimbursed as in the case of Balancer when over $500,000 was hacked.
DeFi promises to build an open market where investors and lenders can co-interact, however, there are trust issues because of the possibilities of hacks. Therefore, liquidity would be low or slow because the investors would stick with investing what they can lose.
At first, DeFi is an Ethereum based application, but that is not the case today as other ecosystems are entering the space. Consequently, it signifies growth. Meanwhile, there are other prospects of DeFi in the coming years you should expect.
The antidote to decentralized finance ecosystem is a DAO. Unlike the partial decentralized DeFi, where a central party can make decisions within the system, decentralized finance in a DAO would give every party a voice by ensuring a consensus and democratic financial ecosystem driven by smart contracts.
All financial solution dApps
The DeFi platforms are limited in the services they offer. Therefore limiting a user who wants to borrow, save, or invest, to a few range of services available on the platform. In the coming years, the DeFi platforms would include more services for its users. More so, someone would not need to go off the platform to sort to other financial needs since it would be provided on the platform.
Imagine that you are using an Ethereum based DeFi ecosystem and, for any reason, need to switch to the services offered by Celo? Currently, you are limited to perform an off-chain transaction; however, in the coming years, the DeFi ecosystem would interoperate with each other.
Secured DeFi dApp
The hacks and security threats in the DeFi projects are surely a warm-up for developers to tighten their belts. Therefore in the coming years, projects would invest more in research and development that guarantees the security of their platforms.
DeFi is an extension of ICO in respect to Cryptocurrency adoption, but they had different objectives. ICO is mainly to enable the Crypto community fund projects of choice, while DeFi gives users a platform to use their crypto for payments, exchange, borrowing, saving, lending, and etcetera. DeFi, having enabled an average user to make transactions in crypto, is the new frontier for cryptocurrency adoption. However, should you have any questions, reservations, or needs for reviews of DeFi ecosystems, or other cryptocurrency projects, you can signup on Mycryptoview to learn or share your knowledge and earn Mycryptoview.com tokens(MCV).