Different crypto markets are sending signals that the biggest innovation is not coming from the biggest cryptocurrency by market cap or price. Instead of the bitcoin token leading the way, it is ethereum and its ETH that are at the forefront of fast-moving technologies. Here, things like DeFi or decentralized finance can be a big change in the domain of not just cryptocurrencies, but also regular banks, as well as insurance companies and money managers.
Recently, the ethereum economy has become even more prominent after reports began showcasing just how much money is moving through them and the number of profits they are making for their owners. Of course, the same field comes with a huge element of risk and insecurity, even for the insanely volatile cryptocurrency markets.
But, this is neither stopping the investors or the developers who are pushing the fast-growing industry of digital assets even further and at a truly astonishing pace. Not only does their development come with astonishing speed and a lot of in-depth changes, but it also includes an ever-widening number of external entities. Now, some believe that DeFi could completely shake up the financial pathways of the globe and all of its individual nations. At the same time, this offers massive potential for the element that is in the core of most DeFi projects – the ethereum network.
The impact of decentralized finance is so big that even regulators of the traditional markets are not acknowledging the sheer level of possibility that is embedded in DeFi field. These naturally immediately come with a big potential for growth and with them, an entirely new bull run of not just ethereum but also bitcoin BTC token and practically all other cryptocurrencies. For a growing number of analysts, the same tech movement is clearly revolutionary and will reach a stage where its existence will not be avoidable even by big traditional banks.
That means that just like with tokenization, which is already underway in many national banks and big financial companies that are all trying to build their digital tokens, massive finance companies will embrace the DeFi technology. With it, whether they want it or not, they will also need to embrace ethereum’s ETH, as well as numerous procedures and protocols that are both based on blockchain and which use their tokens. Like with most revolutions, this one is becoming apparent only when it is well in motion. With billions of USD moving through the DeFi networks, no one can deny that this motion is already here.
Concept of Decentralized Finance
In its basics setup, DeFi represents systems of regular financial services, but which are offered through blockchain network principles. With them, the developers are employing software that is completely based on open source methodology to make semi-automated services. These are mostly trading and lending systems that are made on blockchain networks. Relatively simple to use by both financial backers – whose money is being attained by the lenders – and end-users, who want these services, DeFi is a quiet but earth-moving trend in finance.
Projects like Uniswap and Compound brought in billions of USD in crypto collateral. Projects that offer things like yield farming, from entities like Yearn provide their backers with massive crypto rewards every month, of course, depending on their collateral. Often, these are provided on a fixed-rate basis. However, the big payoffs are still not enough for many to ignore the sheer level of insecurity and possible dangers that also lie in the realm of DeFi.
The crypto industry as a whole did make giant strides as a unified entity in the last couple of years. From the days of Mt. Gox hack, the field of not just bitcoin but also all other major digital currencies managed to learn a lot and then apply the same knowledge to make their systems more issue-proof and thus not only safer but more stable overall. True, the same does not always reflect itself on wildly-swinging market capitalization or price level, but it still offers a giant step in the right direction.
DeFi is only slowly engaging in this process, but is a lot closer to the start line than to the finish tape when it comes to safety and security. Here, coming-of-age challenges are yet to be conquered and many of those are still invisible because the simple giant user base was not there only one year ago. This saw things like SushiSwap which the founder took the cash out route and crashed the market, or Yam, which was afflicted by a devastating bug. But, these are problems that any tech phenomena face, from esports tournaments to streaming services and new social media.
Despite all of the technical problems DeFi faces, the biggest hurdle will remain the national regulatory agencies. That is why in the US, the Federal Reserve is expectedly cautious and even hostile to the possibility of DeFi companies gaining more ground. Then, there is the current problem of the COVID-19 coronavirus pandemic, where any venture that offers huge returns on any kind of investment might be – often righteously – perceived as something potentially malicious. That too is something that DeFi owners and operators must work with and usually, it is best to take on these misgivings head-on. This would include any DeFi operator stating openly what are the potential big drawbacks of using their systems as both lenders and borrowers, for example.
Without that internal transparency and self-regulation, the field will struggle just like cryptocurrencies struggled in the beginning – people will see them as potential scams. Also, just like cryptocurrencies, there needs to be an overall initiative to educate the public about their means of operations and why they are important. This should not be a sales pitch or something of that nature, but a genuine desire to help others understand DeFi. Ethereum also has the obligation to help out in the same process, or even be its spearhead. With those elements in place, the current expansion of decentralized finance is just a start.