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DeFi and the global economy: How can it help?

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DeFi and the global economy: How can it help?

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Our global financial system is being tested as the world faces a new pandemic. Despite multiple events that rocked the financial system, DeFi managed to thrive. In these dire times, DeFi’s blockchain-based technology proved to be a savior for many, revolutionizing the finance sector.

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DeFi, a cryptocurrency-based technology which is an alternative form of financing, is simply put. It is not dependent on any central financial intermediaries like conventional finance. This allows it to cut the costs and increase the security and privacy of transactions while also reducing the risk. Smart contracts, which are generally used on Ethereum blockchains, allow this to be done.

As of July 2021, DeFi’s market cap is almost $80 billion and is expected to rise more in the future. You can track the visible support and growth of DeFi in the DeFi universe’s ever-increasing Total Value Locked (TVL).

Problem

In 2008, the global financial system collapsed. The central banks and governments of large economies committed to not allowing it again. The central banks of major economies made a commitment that they would not allow the banking sector to pose a threat to our social and economic well-being. The 2008 financial crisis was caused by the banks’ extreme risk-taking. Since then, the banking sector has remained cautious and rejected any changes that could affect the entire financial system.

When many people lost their socio-economic lives, the global pandemic served as a reminder to the banks. They now need to make a sustainable and robust recovery from the disastrous economic effects of Covid-19.

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Related: What’s Holding DeFi Back (and How to Fix It)

Great reset

The World Economic Forum (WEF), in the midst of the continuing pandemic, created a program called “The Great Reset” in June 2020. The financial systems recognized that the world’s economy must be restructured from the ground up. It is believed that society must acknowledge and plan for the future, in order to address the covid pandemic’s economic consequences. Blockchain is a way to finance great resets, and DeFi could be the leader of this revolution.

What is DeFi?

DeFi, a Blockchain-based ecosystem puts community first. It provides financial services using distributed networks without a central authority. This means that no one controls the organisations, but they are managed by members of the community.

Banks play an essential role in the current financial system. Banks are the dominant players in financial systems and they are always at the top of their game. DeFi is community managed.

Defi aims to create a functional and fundamentally more efficient financial system through the use of blockchain technology. The following are the three most important aspects of the blockchain-enabled banking system:

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    Payment Systems

  2. Accessibility

  3. Transparency

Similar: How to Get Drawn into DeFi? These are 3 Important Considerations

Secure and new digital world

Covid’s secondary effect is that consumers have become accustomed to using online banking. They can then choose the best way to bank and transact. The financial institutions want to reduce costs wherever possible. Digital platforms could be a great way for them to do this.

DeFi will continue to be a major player in the financial sector and is expected to remain so for the long-term. There are many activities taking place in crypto that relate to DeFi. China, for example, is now releasing the digital Yuan (Central Bank Digital Currency – CBDC) from its Central Bank Digital Currency. European countries follow the example.

DeFi was first used in the early days.

DeFi, although still very young in terms of its capabilities, has already shown its promise in many areas. DeFi’s main applications include financial banking, alternative savings and P2P lending. Investors and fans have invested billions in the technology.

A blockchain-based, decentralized system is more efficient and secure than traditional systems. However, the price volatility of these DeFi tokens has impeded mainstream adoption. Stablecoins are now in the mix. Stablecoins can be described as digital coins that are tied to real currencies such the dollar and yen.

Stablecoins, which are also being developed with Defi are growing as well. Three stablecoins currently make up the top 10 cryptocurrencies, and have a market capital of approximately a trillion dollars. Stablecoins allow a community to transact cryptocurrencies while maintaining stability with a fiat.

Users can also use DeFi apps to keep their money safe and not be tied to banks. They can then farm the funds to provide dollars to blockchain liquidity pools.

Decentralized exchanges are another important use of the new-found blockchain-based technology. They aim to provide both security and speed that traditional centralized exchanges cannot offer.

DeFi challenges

DeFi, as mentioned, is still very young. There are many challenges the technology faces and must be overcome in order to gain wider adoption.

Projects that have not been built correctly pose a security risk. In the past hackers were able to steal millions of dollars of cryptocurrencies through Defi protocol exploits. Many times, it turns out that the protocol is actually a fraud. Therefore, DeFi has a noticeable skepticism.

Next?

DeFi’s potential is undisputedly huge. Therefore, it will be crucial for potential users and existing DeFi leaders to address the security aspect. Developers are finding it difficult to satisfy the demands of their users. Third-party monitoring tools are being used by many. In the future there will be a significant increase in demand for security services. Stablecoins and smart contract insurance are helping to protect users against both cyber threats and volatility.

Although every new technology has its problems, there will be many exciting ways that blockchain can be used to improve society and finance system.

Related: How DeFi Will Reshape Financial Services

Publited Sat, 11 Sep 2021 at 17:12.36 +0000

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