The Future of Finance: Exploring DeFi’s Role in Investment Engines and Crypto Platforms
Finance is a foundational aspect of modern society, in more ways than are immediately obvious to the untrained eye. Financial systems keep the businesses and infrastructure on which we rely afloat, as well as provide the means to transact seamlessly with businesses, online platforms, and even one another.
Within the finance industry, the breakneck pace of mechanical advancement is even more palpable. Where ‘fintech, or commercial technology, was once the obscure remit of small businesses managing the back-end administration of banking systems, today it is a multi-billion-pound trade touching all corners of commerce, and receiving record investment in the process.
A key driver in that investment has been the emergence of a new concept within finance and a sub-industry to accompany it: DeFi. It has the potential to change the landscape of commerce for good – but what is it, and how is it being applied to existing frameworks?
What is ‘DeFi’?
‘DeFi’ is a contraction of the term ‘Decentralized Finance’, which itself refers to a new movement or philosophy couched in technological advancement and critiques of existing fiscal systems. It advocates are of the belief that the future lies in economies and exchanges unbounded by government overreach; these are self-regulating markets that cannot be arbitrarily impacted by negative movements in national economies or currencies.
The central technology behind DeFi as a movement is the blockchain. Blockchain describes a ledger system by which transactions are conducted on a peer-to-peer network and immutably recorded in the process. The same technology powers cryptocurrencies, and more recently NFTs – digital artworks that attain digital rarity due to the immutability of the ledger.
Applications in Contemporary Finance
DeFi concepts are already being folded into contemporary monetary thinking, even as the ideal conclusion of its philosophy remains untested. Cryptocurrencies are trading in similar fashions to stocks and assets but with greater volatility. The blockchain technology behind them is improving the security of transactions for accounting firms, via hack-proof smart contracts.
These are beholden to similar legal challenges as faced by conventional finance, albeit with some fundamental differences relating to compliance; even in a decentralized network, borders are crossed and dealers are accountable to national laws.
Pros of DeFi
DeFi offers a number of benefits, some of which are listed below, read and find out.
- Transparent – Decentralization comes with greater transparency. For example, every transaction on the Ethereum blockchain, accounting for more than 90% of all DeFi traffic, is broadcasted and verified by other users on the network, making it transparent for all parties.
- Easy Access – All you need to have is an e-wallet and an internet connection. The world of cryptocurrency has no boundaries, and you can access its services anytime, anywhere, as it doesn’t have any geographical outer limits.
- Real-Time – The transactions and interest rates are updated every minute, there is no chance of getting information delayed. Also, easy access to the services makes the transactions faster.
- Tokenization – Crypto token issuance is one of the most important benefits of DeFi. These tokens work as digital assets present on a blockchain, providing different features and various uses. Several types of tokens are available, such as dApp, security, or real estate tokens. Every type of token serves different purposes.
These were some of the pros of decentralized finance in crypto platforms, let’s now jump to the cons associated with it.
Cons of DeFi
DeFi is the future of the crypto industry and commercial systems largely focus on its advantages, however, it is important to look at it from a different perspective as well. So, we have listed some cons associated with it.
- Uncertain – The blockchain that hosts the decentralized project is unstable, and that makes the DeFi system uncertain.
- Scalability – The expensive transaction during the time of congestion and long time-taking for confirmations make its scalability a problem for investors.
- Liquidity – DeFi market is smaller in comparison to traditional financial markets. This makes it less trustworthy as in October 2020, more than $12.5 billion of value got locked in its projects.
There were some pros and cons of DeFi that may help you in deciding whether you want to go for it or not.
The Future of the Industry
Blockchain technology is the most impactful part of DeFi as it stands today, and its possibilities are endless – if, at present, limited to existing commercial architecture. With the funding promised to it, though, the corner of fintech threatens to utterly disrupt the world of finance, making the future look altogether different.
Bitcoin was initially conceived as a digital analog to gold, though its real-life volatility put paid to this plan. However, the initial aim to carve out a digital realm of rarity and value unconnected to tangible currencies like the dollar could well be the nail in the coffin for currency as we know it. Investment engines have already adopted cryptocurrency market capabilities, but major banks will not be far behind.