Recently, we have seen leading crypto assets such as Bitcoin and Ethereum continuing to experience low volatility. While they may be going through a struggle, a large number of ‘Decentralized Finance’ or DeFi coins are actually thriving. Over time, they are gaining more attention from many crypto-investors. As a result, these digital coins are reaching record highs.
At this point in time, the entire blockchain world has its attention set on Decentralized Finance. Put simply, a trend has not captured the entire community’s discourse since the boom of the 2017 Initial Coin Offering craze. And this mania is not without good cause either.
Rise in value
Unlike ICOs of the past, DeFi products are not necessarily a promise of something to come. They are not a “wait and see” for something that will develop and be ready to go at some point. As a matter of fact, they already have a use case in operation. Since the start of 2019, it is clear to see that the crypto space has grown rapidly. This progress has ceased to slow down, even as the world’s economy falls under recession thanks to COVID-19 outbreak.
Between September 2017 and now, there was a noteworthy explosion in the total value of DeFi contracts. It would go from $2.1 million USD to an astounding $6.9 billion USD. In pounds, this is £1.6 million to £5.3 billion. Ever since the start of this month, it would continue to grow, reaching up to $2.9 billion USD.
This is the driving force behind a massive rise in the value (i.e. market capitalization) of tradeable tokens. Specifically, those that DeFi smart contracts typically use. At this point, it is roughly $15 billion USD, which is close to double the beginning of the month. An array of tokens would experience a value increase by about three or four times in a year. For others, it is significantly more.
What is DeFi?
The main focus of cryptocurrency is to make money and payments universally accessible to anyone in the world. It doesn’t matter where you are in the world. The ‘DeFi’ – or ‘Open Finance’ – movement aims to take that promise to the next level.
Something like this is now possible to execute thanks to smart contract blockchains, such as Ethereum. ‘Smart contracts’ are programs that run on the blockchain and are capable of enacting automatically upon certain conditions being met. These smart contracts are what allow developers to construct more complex functionality than merely sending and receiving cryptocurrency. These programs are what we now recognize and address as ‘decentralized apps’ (DApps).
DeFi commonly refers to the digital assets (defi coins), and financial smart contracts, protocols, and DApps that are on Ethereum. Put simply, it is financial software that is built on the blockchain that is able to be pieced together. Think of it like Money Legos.
To reiterate, the main goal of DeFi is to design a financial system that is open and accessible to everyone. Moreover, it hopes to minimize the need of many to trust and heavily rely on central authorities. Pieces of technologies like the Internet, cryptography, and blockchain give us valuable tools. With them, we can collectively build and operate a financial system without ever needing to involve central authorities.
In the blockchain space, there is a popular saying: “Don’t trust, verify.” What does this mean? Well, with a blockchain network, individuals can verify any and all transactions that are occurring on the blockchain.
Noticeable growth courtesy of the pandemic
Approximately $4.62 billion in USD are in Decentralized Finance. A large portion of this growth took place during the last three months and continues to increase in speed since July. And this is even after the world’s markets were starting to enter a recession. A lot of people are of the belief that this is the start of an irreversible trend. One that will likely keep on pushing blockchain closer to mainstream adoption.
When the pandemic comes to an end, the world will gradually begin to rebuild itself. During this period of time, there will be an opening for blockchain to shine. Plenty of the older systems unfortunately broke down throughout this crisis. As a result, they will need to undergo reshaping in a considerably different way. In the process, they will become much more resilient to operate. What’s more, they will be much cheaper to run information markets, supply chains, medical systems, and finance.
DeFi makes a promise to reestablish the significance of blockchain in the world following the pandemic. Bringing traditional financial services to the blockchain is a rather powerful idea. The same thing applies to opening them up to the public. Some exchanges like Remitano are an accessible platform to anyone with very little knowledge about blockchain technology. Trading, savings, liquidity pools, investments, etc. are in a similar position. This will only continue to expand in the future and in turn will generate more innovations in the economy.
Importance in developing nations and project creations
In Nigeria, the financial power of decentralized finance is especially substantial. Being a developing nation, the application of new technologies could open an array of doors. For one thing, it has the potential to allow the country to jump ahead of more advanced nations. Specifically, those that depend on older technologies prevailing in the financial market. Therefore, DeFi is among some of the great promises of people who reside in countries outside the more developed world.
DeFi’s influence would effectively trigger an array of opportunities, which made several projects common knowledge in the crypto world. Some of these defi coin projects include the following:
In some aspects, these are the most successful and popular projects operating in the space right now. Many people are aware of them and many use them on a regular basis. Be that as it may, the DeFi revolution is only just beginning. There are still plenty of projects on the horizon and some that are just getting started. Some are even on a low profile. The bottom line is that many of them have the potential to be the next big thing.
As time passes, we are seeing more and more just how behind the curve regulators are falling. As a result, DeFi has managed to find great success in flourishing within this vacuum.
Let’s take a look at traditional unsecured lending as an example and a point of comparison. In this case, there is a legal requirement that requires lenders and borrowers alike to know each other’s identities. Moreover, the lender must assess the borrower’s ability to properly repay the debt. Now, when it comes to DeFi coins and financial products, there are no requirements of this kind. In lieu of this, everything focuses on a sense of mutual trust and privacy preservation.
Regulators now need to weigh a considerably delicate balance. On one side, there is the task of suppressing innovation. On the other side, there is the failure to protect society from an array of risks. These include individuals putting their money into a space that is without regulations. Alternatively, banks and other financial institutions could potentially fall short of making a proper living working as intermediaries.
Realistically speaking, the more sensible choice would be to embrace whatever change occurs. And, as a matter of fact, that very thing is happening. In July, there was a major shift at the hands of the US Securities and Exchange Commission (SEC). They are starting to embrace DeFi by finally giving their approval to an Ethereum-based fund, Arca.
Not only is this welcome, it is significant. When you think about it, one of the challenges that financial innovations typically face is hostility. One whose creation is thanks to obsolete regulations of a bygone era. This is why some DeFi projects fail to get off the ground, let alone stay afloat. Major ones include the New-Jersey-based Basis.
Reasons behind the craze
The pandemic plays a role in this collective mad dash to Decentralized Finance. It is also responsible for global interest rates dropping. There are some jurisdictions, like the eurozone, that are residing in negative territory. Others, such as the US and UK, have the potential to go through the same thing.
DeFi coins, especially in this climate, have the capacity to offer comparatively higher returns to savers than high-street institutions. For example, Compound is offering an annual interest rate of 6.75% for those saving with the stablecoin, Tether. You will receive more than just interest; you will also get Comp tokens. This, as one might expect, is an additional appeal.
Up to two-thirds of people who do not have bank accounts own a smartphone. With that in mind, DeFi could potentially open up finances to them.
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