crypto.news is your go-to source for DeFi news, covering the most important developments in the cryptocurrency and blockchain sectors. Of course, perhaps the most groundbreaking development in crypto to date is the development and rise of the DeFi industry.
DeFi, or Decentralized Finance, refers to financial instruments and services hosted on blockchain networks. DeFi is distinct from traditional finance because it is not centralized, meaning there is no central authority dictating rules and terms. Many DeFi services are community organized, allowing members of a DeFi network to vote on the way financial services will be offered.
DeFi services include lending and borrowing, insurance, staking funds for yields or interest, and more. The goal is to eliminate the need for middlemen and institutions such as banks entirely. DeFi uses smart contracts to operate. Smart contracts are self-executing pieces of code that will perform an action when certain criteria are met. For example, a DeFi smart contract will pay out a fixed sum of money based on how much someone has staked on a lending platform, with no human staff to carry out that action.
Due to there being reduced costs, i.e., few staff and no physical buildings required, DeFi lending protocols have been able to offer much more attractive interest rates than traditional services, at times giving users loans at close to 0% interest. People who lend on DeFi or stake their funds often receive 10% interest, which again, is more appealing than traditional interest rates for lenders.
DeFi is still at an early stage of development, and an argument could be made that no financial platform is truly decentralized yet – however, this may soon change. The St. Louis Federal Reserve Bank in the U.S. lauded DeFi as potentially game-changing in the finance world, stating that if the technology can get off the ground and overcome the obstacles faced in true decentralization, DeFi will be adopted everywhere due to being more efficient and cost-effective than traditional alternatives.
The bank stated that “DeFi has unleashed a wave of innovation in the financial industry.” These obstacles include hacks, software error, and bad practice by developers. Many hacks and software exploits have already occurred in the DeFi space, measured at $2.1 billion in losses in 2021. At the beginning of 2022, the value of assets locked in the DeFi industry was around $90 billion.
DeFi developers are building an ecosystem of decentralized applications, or Dapps, to create a transparent, secure, and trustless financial system. Blockchain code is open source and publicly accessible, allowing the public to audit financial projects themselves and determine whether fair practices are in place.While lending and borrowing are the main use cases today, decentralized exchanges are also growing in popularity. These exchanges allow all trading to be done peer-to-peer. The exchange cannot seize user assets and is less vulnerable to regulatory crackdowns due to being a semi-autonomous piece of software, often governed by a community in a democratic way.
Although DeFi is still in its infancy, there’s no question that the new technology is already proving to be extremely disruptive in the finance world, potentially loosening the monopoly on financial services currently held by major banks.