DeFi’s Open Road Is The Future of Financial Services

This emerging infrastructure is transforming finance — and it’s here to stay.

Decentralised Finance (DeFi) is on a mission to build an open, free and transparent financial services ecosystem on the blockchain. It’s accessible to everybody and free of intermediaries and centralised government control. In other words, the ideal financial system for the new Web3 world, where digital decentralisation radically reshapes everything — including money.

Worldwide, institutions, fintechs and society have reacted to DeFi’s disruptive potential. That disruption also attracts controversy and extralegal profiteering. But the landscape remains fascinating and profitable — so long as safeguards and ethics stay in the conversation.

The DeFi Way

DeFi’s users control their assets completely, engaging via peer-to-peer (P2P) decentralised apps throughout DeFi projects (dApps). Engineers build application architectures on blockchain networks accessed by investor communities. Liquidity comes from smart contracts. Cryptocurrencies like Ethereum collateralise this short-term liquidity, which “liquidators” (market participants) use for investment opportunities.

For longer-term liquidity, decentralised stablecoins serve as steady assets.
Via its ETH cryptocurrency, Ethereum has become DeFi’s smart contract platform of choice. Its market cap slots it in-between Bitcoin ($887 billion) and Stablecoin ($82 billion) as the second-largest cryptocurrency ($424 billion).

DeFi’s Advantages

DeFi doesn’t need third parties.

This is decentralisation’s most obvious advantage over the established system. Arguably, it’s the most attractive.

While the latter relies on banks as intermediaries and courts to settle issues, DeFi users own all their assets. Every possible issue — resolved by the software code. This improves the system by lowering the cost of supplying and using items.

Via Decentralised Exchanges (DEX), users exchange assets without sending their financial information to a third party. They can make account-to-account transfers, thanks to smart contracts.

The Future of Digital Finance

As DeFi and cryptocurrencies grow too great to ignore, financial institutions and international governments respond with central bank digital currencies (CBDCs). Like cryptocurrencies, CBDCs are publically accessible digital money. Unlike them, that money is equivalent to the issuing country or region’s currency. CBDCs are now available in Ghana and Nigeria, while El Salvador and the Central African Republic (CAR) are the first nations to recognise Bitcoin as legal tender.

Yet DeFi can not only mimic traditional finance, but outperform it. Ethereum processed over $11.6 trillion in transactions in 2021, surpassing Visa (the second-largest payment processor) by roughly $1.2 trillion.

The Other Side of Disruption

Still, that potential comes with downsides.

Multinational regulator IOSCO recently reported on potential DeFi vulnerabilities. They cited a lack of disclosure about the system and products, potential scaling issues, and DeFi sites’ patchy reliability.

Even institutions aren’t immune. Ghana and Nigeria’s CBDCs have been accused of undermining ECOWAS’s regional African currency project. Yet, using DeFi, Africans can transact across borders without navigating myriad financial systems and currencies.

Some describe DeFi assets as “sanction-free.” Here’s the truth: they’re not.

Operating outside regulatory frameworks leaves crypto vulnerable to manipulation and misuse, and the ongoing Russian sanctions exacerbate this even more. With digital Ponzi schemes on the rise there, the U.S. Treasury has blocked Russian Bitcoin miners from accessing American crypto resources, following the EU’s crypto restrictions. Criticism of the CAR’s Bitcoin adoption not only echoes that of Ghana and Nigeria, but illustrates Russian allies’ increased scrutiny.

Software engineering is key to de-risking. As code failures and hacks see billion dollar losses, DeFi teams hire better engineers for faster and more secure products. They also have their code audited to reduce smart contract defects.

Conclusion

DeFi applications give users one-of-a-kind products, greater efficiency, rapid innovation and cheaper cross-border payments. Through these, DeFi is creating the financial system of tomorrow: better, faster, uncensored and open to all.

With communities expanding and sharing knowledge, de-risking awareness and implementation grow with them. Blockchain platform Chainanalysis recommends that the public and private sectors educate investors to make informed choices.

All in all, DeFi is an exciting ecosystem with extraordinary year-on-year growth. Though its long-term success and acceptance are unknown, we expect it to continue developing groundbreaking solutions without sacrificing the security of traditional transactions.

Article written by Barima Owusu Nyantekyi

turntabl is revolutionising software engineering. Visit our website to learn more about our work and disrupt the status quo together.