Why DeFi is the Finance Revolution (Retail)
--
The introduction of decentralized finance (DeFi) has been a pivotal moment in the history of traditional finance. DeFi rose to fame in the summer of 2020 with yield farming; The meteoric rise of tokens promising attractive yields to crypto traders such as Compound and Sushiswap, absolutely took over. According to multiple sources, the Total Value Locked (TVL) across all DeFi protocols is just South of a staggering $300B with no signs of slowing down. In addition, according to Dune Analytics, there are over 4 million unique addresses using DeFi applications — a growth of over 40x in the last 2 years.
While numerous fintech startups have emerged in the last decade, they are predominantly built on top of existing financial infrastructure. The creation of financial products and services has always been a process from the top-down, dominated by the prominent financial institutions such as asset management firms, commercial banks and insurance companies.
In contrast, DeFi takes a bottom-up approach to innovation that takes the component of centralized finance and effectively replaces human intermediaries with math-based equations, paperwork with smart contracts and legal enforcement.
DeFi for Retail Investors
While there are numerous use cases for retail DeFi, I focused on the three most important below — APY — Payments — Lending & Borrowing
APY
According to the FDIC, the national average interest rate on savings accounts stands at an atrocious 0.06% APY. Basically, you provide banks with your hard earned money so they can generate attractive returns for themselves (4–5% APY) and give you pennies on the dollar. No longer should you lock your capital with an intermediary who doesn’t compensate you fairly; Instead, you can lock your capital into the DeFi ecosystem, comfortably earning at least 4% APY if not much much more (given risk tolerance).
Payments
In the centralized finance market, when a consumer makes an online payment to any merchant, there are various intermediaries involved; such as an issuing bank, acquiring bank, multiple payment processors like AMEX/Mastercard and a payment gateway for validating, securing and executing the transaction.
This entire process drastically increases the transaction cost, thus keeping these intermediaries healthily in business. In the DeFi ecosystem, the same transaction will be executed, secured and validated by blockchains such as Ethereum or AVAX, which form the base layer of the DeFi application and act as a act as the single source of truth for all transactions within the network. Net net, DeFi reduces transaction costs, increases transaction speed and provides enhanced security.
Lending & Borrowing
Imagine having the ability to invest without having to meet a minimum asset threshold & Imagine taking out a loan without having to do any of the paperwork. DeFi lending offers the attractive promise of returns and the means to avoid leaving crypto-assets idling in a risk free manner.
DeFi-lending protocols have enabled decentralized lending and borrowing through a series of smart contracts, which replace the usual risk factors in traditional finance. Lenders can deposit their crypto holdings to earn interest, while borrowers can receive these funds, as long as they overcollateralize the amount in the form of other digital assets. This process is made possible through lending pools, each of which has their own unique characteristics.With enough collateral, any borrower can access liquidity. Interest rates are exclusively determined by an algorithm that balance the supply and demand off the assets lent and borrowed. In many cases, holders of the protocol’s governance token can actually vote on interest rates as part of a decentralized autonomous organization (DAO). This allows participators to be decision-makers on the important parameters of the DeFi protocol. Thus, taking us one step closer to true decentralization and democratization of finance.
TLDR: DeFi empowers everyday investors access to new asset classes, reduce their fees, improve their APY, and essentially take more control over building their financial future.
Thanks for reading and Feel free to connect w/ me on Linkedin
