The majority of the world was financially excluded till the 20th century. The advancement of the internet and digitization in the early 21st century created a broad framework for mass financial inclusion. Having a transaction account to store, receive and send money is the basic building block for including people financially. Economic growth can be bolstered by the creation of a digital economy and access to digital financial services is extremely critical for that. Traditional finance has become quite adaptive today to include more and more people and providing access to transactional accounts but access and usage have a gap area. The world’s unbanked population has got reduced in recent times but there are still billions of people who can’t access any financial service for various reasons. The gender gap in account ownership is another issue that hinders women to control their financial lives. DeFi or decentralized finance, which doesn’t rely upon a third party or custodian, has really created a new possibility for financial inclusion.
The term ‘DeFi’ was non-existent a few years ago. Ethereum gave the platform for running decentralized applications first and the movement of DeFi originated on Ethereum. The idea of lending-borrowing without the intervention of any centralized authority caught public attention in 2018-19 and by 2020, it became a movement. Many people discarded the success of DeFi by calling it another ‘hype’. We really don’t need so many food coins and yield farming platforms but the novelty of DeFi is really pathbreaking. DeFi is open source, permissionless and participatory in nature. The users control their assets always and the smart contract codes are publicly auditable. The flow of the fund is visible on the blockchain and thus it provides immense transparency. The trustless feature of DeFi is onboarding new individual and institutional investors every day. In the last one year, DeFi TVL (total value locked) has grown from $1.044B to $36.57B i.e., 3402% growth. New opportunities and innovations related to DeFi are being created at lightning speed. A DEX like Uniswap is competing with top centralized digital asset exchanges as per trade volume nowadays. The robotic smart contracts of DeFi are ruling blockchain finance. We’re observing an epoch-making financial excogitation. The interesting case is that DeFi is growing while traditional finance is also growing. It shows that DeFi has extreme potential to expand economic activity beyond anyone’s imagination.
Image from defipulse
The biggest virtue of traditional finance is that everything is interconnected and that’s why the financial system is able to take a huge load of transactions. Blockchain scalability will happen slowly as technological progression happens but the blockchains must talk to each other. Then only we can see a fair distribution of transactional load without making any compromises. Ethereum is wonderful for building applications and quite robust but it can process a maximum of 15 transactions per second. To bring wall street traders to DeFi, we need lightning-fast cheap transactions without choking the system. ‘Scalability Trilemma’ is a big problem of blockchain technology. To make a blockchain scalable, we can’t compromise with decentralization and security. The trilemma depicts that it is impossible to achieve perfection for a blockchain in these three parameters altogether– scalability, decentralization and security. To address this issue, we need quite a lot of blockchains (some can be specialized to handle a specific type of work) but interoperability will be very important. Without interoperability, we’ll only create isolated islands and that will put a barrier on the mass adoption roadmap of DeFi.
Just imagine a situation where you go to a merchant store with a Visa Card and find out that they accept only Mastercards. Disastrous right? The same thing happens when you have ETH in your wallet but the person, with whom you want to trade, has only a Bitcoin wallet. Yes, there are different decentralized, centralized or semi-centralized blockchain bridges now but we need an advanced level of interoperability. Crypto tribalism didn’t allow compatibility of the blockchains and the developers were busy fighting with each other by creating independent systems. The need for the hour is very clear. A user must be enabled to exchange or refinance his/her assets seamlessly across different blockchains. DeFi needs bank card compatibility.
Cross-chain DeFi transfers can be achieved only through true interoperability. ‘Atomic Swap’ came as an experimental solution earlier but all blockchains can’t work with this. The projects like Polkadot or Cosmos can really make wonders down the line as these are interoperability focused projects. Polkadot has a feature to bridge any blockchain through its ‘parachain’ feature. There is a risk to tokenize other blockchain assets on a PoS blockchain too. Suppose, we tokenize a very high level of BTC or other assets on Polkadot or Cosmos and the value of the tokenized assets exceed the value of the native tokens at stake – then misbehaviour of the validators can bring disaster to the ecosystem. Interoperability of the blockchains won’t come very easily ensuring security! It is also understood that only one project can’t serve the interoperability needs of the industry. We need to create standards first to fulfil the interoperability dream. DeFi must blossom in all seasons. Let’s inseminate the right soil.
Note: This post was first published here for Cryptowriter in association with voice.com.