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By Stan Bharti
In 2022, Decentralized Finance (DeFi) gained the spotlight as the broad cryptocurrency market suffered carnage because of the shocking collapse of the stablecoin TerraUSD and several centralized crypto lenders defaulting and filing for bankruptcy.
The debacle has wiped trillion dollars from the crypto market, resulting in a loss of credibility among retail investors. Interestingly, though, DeFi platforms remained unaffected amidst this carnage, and continued to work as intended.
DeFi has shown great resilience and strength during these dark times. In fact, the sector continues to innovate and gain traction.
While the sector has lost billions of dollars in TVL (total value locked), protocols and teams remain focused on building the foundation of a peer-to-peer financial system that is open, permissionless, decentralized and has no single party in control.
The 2008 financial crisis showed just how fragile our current financial system is. After all, since the Industrial Revolution, the financial infrastructure has seen barely – if any – structural changes, and continues to be heavily reliant on banks and financial institutions.
Besides dealing with intermediaries, this system also has high entry barriers to entry, is opaque, and involves high transaction costs and inefficient processes, thus resulting in limited innovation.
This is where DeFi came in, with the promise of open finance being accessible to all. The introduction of DeFi has been a pivotal moment in the history of finance, which first rose to prominence in the summer of 2020. In the last two years, the number of unique addresses as a proxy for users using DeFi applications has grown over 40x to more than 4 million.
DeFi is a bottom-up innovation replacing human trust with self-executing smart contracts, aiming to be faster, cheaper and much better than today’s financial services.
It wouldn’t be far off to say that DeFi will revolutionize finance much like the internet did for information.
Big Advantage
It all started with Bitcoin, which allowed anyone to send and receive money from anywhere in the world without the need to involve a trusted third party. Then, the launch of Ethereum as a smart contract platform enabled developers to build innovative, complex, and decentralized applications.
This led to the proliferation of native cryptocurrencies and stablecoins, compared to fiat and assets like fiat, gold, stocks and loans in centralized finance. In the latter system, several intermediaries are involved whenever one makes an online payment, which increases the transaction cost.
In the DeFi world, meanwhile, the same transaction is executed and validated by the blockchain. Transaction processing, clearing, and settlement only happen when a transaction is broadcasted on the network. This eliminates the need for intermediaries, and serves to drastically reduce the cost of transactions.
This entirely new financial system that uses cryptography, smart contracts and blockchain technology is completely independent of the traditional financial (TradFi) economy. Now, a significant amount of development and investment has been placed into the advancement of DeFi in order to provide a better outcome for users.
Additionally, interoperability is an unavoidable structural problem in TradFi, with various obstacles preventing different platforms and systems from connecting – whereas in DeFi, all you need is a wallet. Then, you simply go to an exchange, connect your wallet, and you’re ready to go.
With DeFi, the idea is to bank the billions of unbanked worldwide. And while this sector is still in the nascent stage, it is constantly evolving.
In its initial phase, DeFi was rich with easy-to-capture high yields but obscure risks. But then, the complexity of DeFi protocols resulted in technological and economic hazards in terms of exploits and manipulation attacks. With this, the space has become complex, and high returns scarce. And while high yields won’t ever be as easy as they were in DeFi’s early days, in light of recent events, the market is evolving to find a balance between risk and return.
This new phase of DeFi promises a more mature economic structure to appeal to both retail and institutions.
Massive Opportunity
At present, there is a ton of innovation happening in the DeFi space – starting with lending, borrowing, stablecoins, assets, yield farming and trading.
Synthetic assets are one of the fastest-growing sections of DeFi. Here, smart-contract technology creates synthetic securities that trade on blockchains. These synthetic securities enjoy the benefit of 24/7 liquidity, borderless transfers, censorship resistance, and liquidity pool farming over traditional securities.
In truth, DeFi represents a massive opportunity to disrupt any financial contracts, from insurance (which is a $6 trillion market), to the $90 trillion stock market and the gigantic $1 quadrillion derivatives market.
With DeFi, the execution and settlement of trade can happen simultaneously, which further reduces inefficiency, eliminating intermediaries and significant fees that are charged by trusted third parties even on basic transactions.
Moreover, DeFi is – by definition – highly competitive and incentivized to offer better services to its users. Not to mention, there’s no distinction between different actors in the DeFi, and everyone is treated as equal.
Take Valour, for instance. They leverage decentralized technology to issue Exchange Traded Products (ETP) with a focus on digital assets, including DeFi tokens. These Bitcoin, Ethereum, Solana and Uniswap-based ETPs are listed on regulated stock exchanges, enabling individuals and institutions to invest in crypto simply and securely.
ETPs track underlying assets and, much like stocks, trade on exchanges and experience price fluctuation on a daily basis. These are usually low-cost alternatives to actively-managed funds, and provide additional liquidity. ETPs can also contain a few – or hundreds – of underlying investments.
Using decentralized technology to issue ETPs allows us to offer digital assets trading transparently and securely, as well as remove management fees from the equation.
Of course, DeFi is not without its risks. Rug pulls, impermanent losses and bugs are some of the unique issues to the space. But this is just the beginning, as DeFi itself is still in its early stages. Even so, its benefits in terms of increasing efficiency, reducing costs, offering privacy and transparency, encouraging financial inclusion and bringing more value to their communities can’t be ignored.
Indeed, an impressive amount of capital has already flown into the sector, which will further increase as its adoption rises. Moving forward, the DeFi space will continue to see more innovation as the technology evolves, creating new and exciting opportunities.
About the Author:
Stan Bharti is a recognized international businessman and entrepreneur with over thirty years of hands-on experience in the mining, oil and gas, technology and finance sectors. Stan is the Founder and Executive Chairman of Forbes & Manhattan Inc, an international merchant bank and finance house focused on natural resources, infrastructure, energy and technology. Forbes is recognized around the world as a leader in discovering, financing and building projects through to completion.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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