DeFi (decentralized finance) is revolutionizing the cryptocurrency market. What challenges, and above all, what opportunities for investors?
In the cryptocurrency sector there is a new term among the interested parties, "DeFi": but what is it and what opportunities does it generate what some experts identify as a real revolution (and evolution) within the market?
Over the past three years, there has been exorbitant growth within DeFi, a term used to refer to decentralized finance.
This area of the cryptocurrency sector is attracting more and more attention to itself, so let's see what DeFi is, which players operate there and what opportunities it offers.
What is DeFi (decentralized finance)?
DeFi includes all those financial services that use smart contracts, automated executive agreements that do not require the presence of intermediaries and that, instead, use blockchain technology directly on the Internet.
In just three years, the value of DeFi-related smart contracts went from $ 2.1 million to $ 6.9 billion - an increase of $ 4.8 million, of which 2.9 million was recorded in August 2020 alone. .
This has resulted in a significant increase in the market capitalization of the tokens used within these contracts (at the moment it is about 15 billion dollars). Many of these tokens have tripled or quadrupled in value. Others have gone even further: Synthetix has risen over 20 times and Aave nearly 200 times. To make the concept even more understandable, if you had bought $ 1,000 of Aave a year ago today you would have nearly $ 200,000 in your pocket. (I have 30 different currencies, if only one had done so .... definitely not stonks)
Why DeFi is revolutionizing the cryptocurrency market
DeFi, which for the most part is built on the Ethereum blockchain network, is the new trend that promises to revolutionize financial technology similar to what Bitcoin did 11 years ago.
The area in which decentralized applications (dApps) have managed to gain the most space is that of cryptocurrency trading on decentralized exchanges (dex) such as Uniswap. Each exchange is entirely peer-to-peer, no company or institution owns the platform.
In addition to totally free cryptocurrency trading, DeFi-related services include the ability to lend or borrow cryptocurrencies by accruing interest using platforms such as Aave or Compound. Augur, on the other hand, allows you to bet. With PoolTogether you can participate in a lottery without losing a single euro: in the end everyone is refunded the cost of the "ticket" and the lucky winner receives the accrued interest. You can trade derivatives of real assets, currencies or precious metals, on Synthetix. Etc.
Although many of the dApps today are extremely niche, future applications could have a big impact on daily life. In the not too distant future, we may be buying a home on a DeFi platform with a mortgage.
All deeds would be written in tokenized form on a blockchain ledger as collateral and, in the event of a default, the deeds would be automatically transferred to the lender. Since no lawyers or banks would be needed, it could make the whole home buying and selling process much cheaper and incredibly faster.
Market regulators (in simplistic terms we could say "the authorities"), once again, have not been able to intercept this trend in time: there is no regulation and so DeFi has been able to move and thrive in very short time. In decentralized finance, it is not necessary to know the identity of the person who operates in it or, for example, the creditor does not need to evaluate the borrower's ability to repay the debt. Everything is about MUTUAL TRUST and the protection of privacy.
The authorities have the difficult task of finding a balance between stifling innovation, defending society from the risks associated with putting money in an unregulated space and ensuring the survival of banks and other financial institutions. But it makes more sense to embrace change.
And maybe we're finally moving towards this solution: In July, the US Securities and Exchange Commission (SEC) took a huge step towards DeFi by approving for the first time an Ethereum-based fund, Arca.
Challenges and opportunities of DeFi
This fact is of considerable importance: the first of the main challenges for financial innovation is represented by the hostile environment created by the archaic regulations written for a bygone era, very different from the present one.
An opportunity, which justifies the surge that DeFi has recorded in the last period, is hidden in the choice of "traditional" players to be involved in this sector.
Many top-tier financial institutions are starting to embrace DeFi by looking for ways to get involved. Proof of this is the fact that 75 of the world's largest banks are experimenting with blockchain technology to accelerate payments as part of the Interbank Information Network, led by JP Morgan, ANZ and the Royal Bank of Canada. All three VERY important names.
Well-known asset management funds are also starting to take DeFi seriously. The most prominent among them is Grayscale, the world's largest investment fund in the crypto industry. In the first half of 2020, it managed over $ 2 billion in assets related to the cryptocurrency market, including 4 billion bitcoins.
COVID-19 (and more) as a growth driver
But COVID-19 has acted positively on DeFi in the last period, you got it right: the pandemic has further lowered interest rates around the world. In the Eurozone, the ECB now has rates in negative territory, and countries such as the United States and the United Kingdom may soon follow suit.
In such a context, DeFi offers potentially much higher returns for savers. Furthermore, two-thirds of people without a bank account have a smartphone, which gives decentralized finance the ability to intercept a large chunk of the market, giving them access to the world of finance.
Another factor that explains the boom of investors buying DeFi tokens is the desire of the latter not to be excluded in any way from their dizzying growth. Many tokens are worth nothing or almost nothing in practical terms, so it is clear that we are faced with an exuberance that we can define as irrational.
One fact is certain: the main trend is heading towards a new financial system that is more liberalized and decentralized than before.
And what do you think of DeFi? Are we ready for such a change? Let me know yours in the comments.
As always, thank you if you have come this far, and see you next time!
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