By Brad Yasar, Founder and CEO of EQIFI
At dawn, internet skeptics were openly critical, pointing out their distaste for technology. The famous astronomer Clifford Stoll asserted that “commerce and business will grow from offices and shopping centers to networks and modems‘was’ nonsense’, and the potential of the internet was nothing more than a fad train traveling too fast for its own good. Obviously he was wrong. Currently, decentralized finance (DeFi) is experiencing a similar growth phase. Regardless of those who oppose the idea, the technology is booming, reaching a market cap of $ 133.34 billion in 2021, and a system that opens up access to finance for millions of people around the world is certainly not âfoolishnessâ.
Just as Google and Amazon have become the representatives of the Internet for consumers, brands that offer DeFi products, such as EQIFI, Nexo and Celsius, will be the representation of technology for consumers, which aims to disrupt middle-level finance. Currently we are focusing on what DeFi is and how it works, which is of course necessary and follows the progressive path previously traveled by the World Wide Web. Soon, however, we’ll start to see the focus on actual products and services as more and more people begin to understand the technology.
DeFi’s role in finance will soon expand
Yield farming, the process of betting cryptocurrencies to earn more as passive income, will likely continue to drive the majority of DeFi’s growth. Although yield farming is currently mostly on the Ethereum network blockchain, cross-chain bridges and interoperability solutions will soon close the gap between blockchains. institutional investment to space as well as attracting retail investors hoping to profit from their crypto portfolio.
Beyond yield farming, innovations built using DeFi will change the financial landscape of the future. Trustless Liquidity Protocols and other DeFi products are at the forefront of finance and cryptoeconomics. By removing the middleman from these financial processes, DeFi Money Markets can help create a more accessible, fair, and open financial system available to anyone connected to the Internet.
DeFi is poised to transform traditional financial systems that have existed for thousands of years into decentralized models. For example, before the introduction of DeFi, yield farming was only available through centralized sources for institutions lending funds to individuals and businesses. Open up processes like this to retail consumers and 1.7 billion unbanked people through decentralization will offer the masses the financial opportunities enjoyed by the privileged few.
Created to be a trustless alternative to the traditional financial structure, DeFi enabled smart contracts already have already started to filter in traditional industries. In industries like insurance and real estate, DeFi can make the implementation and management of derivatives much easier than current technology and the power of people. Trustless communities will begin to form around industries, helping to create democratized financial economies through newly established parameters. In this sense, DeFi holds the capacity to transform the procedures associated with almost every aspect of society, which it will begin to do if regulators allow it.
The CeFi hybrid model (Centralized Finance) – DeFi
DeFi’s role in the future economy, many years later, will be one of the absolute. It is likely that in half a century, traditional banking structures will be abolished and decentralized structures will reign supreme. In fact, according to Gartner, the next decade will see 80% of financial companies closing their doors or being rendered useless by new competition, changing customer behavior and technological advancements. However, it will be a slow and arduous process, rich in opportunities for banks and centralized players to adapt and innovate for new profitability.
The disruption of the world of finance will involve a hybrid financial model interconnecting the revolutionary technology enabled by DeFi with the long-established structures of traditional banks. Central banks, clearing houses, regulators and supervisors of the economy will have a key role to play in the digitization and decentralization of the financial system. While traditional and decentralized practices are often opposed, few seem to envision the benefits associated with combining the best of both worlds.
Fintechs like Revolut are actively involved in crypto finance, having made crypto trading easier for their users as early as 2017 and now holding over half a billion dollars. of cryptocurrency on behalf of clients. As a centralized business model providing consumers with access to crypto, Revolut hints at a future where digital assets and CeFi will coexist. It also shows us that consumers need a comfortable crypto experience. We will soon see crypto and DeFi offerings become more accessible to the masses. This is already the case with EQIBank, the digital bank offering regulated access to crypto.
With DeFi offering improvements to digital identity, the ability to tokenize derivatives, and the facilitation of payment solutions for the underbanked, it seems like a win-win solution for all parties involved. So what’s holding us back?
Regulation and reputation
Regulators such as the Office of the Comptroller of the Currency (OCC) work to change the perception of banks on digital currencies, believing that digital assets could positively lead financial institutions towards a new era of innovation and efficiency. While this is a promising start, more initiatives like these are needed to change perceptions of crypto. Traditional banks constantly defend their territory by believing that risks associated with digital assets and DeFi outweigh the myriad of benefits associated with adoption, stifling innovation and progress for the DeFi and CeFi worlds.
Currently, there is no regulatory framework or standards body focused on the further growth of DeFi and its integration into the world of traditional finance. In traditional financial markets, bonds and stocks are verified and classified by long established systems. Until similar regulatory principles are used to categorize DeFi-compatible products, the industry will be stifled and prevented from developing to its full potential. Without immediate regulatory clarity, DeFi will be forced to stay on the innovation sidelines with other blockchain-based developments, progressing more slowly than it should.
A big concern for regulators is that DeFi could replace bankers and brokers who enforce anti-money laundering laws, creating an unfamiliar economic environment that regulators would have to navigate. Without being armed and understanding the benefits of adoption and the potential for CeFi-DeFi collaboration, one can’t really blame regulators for their reluctance to change the processes they are so used to.
It is the responsibility of the crypto community to continually advise and guide regulators and governments in the right direction. Initiatives such as DeFi for the people can help industries identify how to integrate DeFi into their existing business models. Education and actions like this will help traditional bankers and regulators become familiar with blockchain technology. Coupled with the continued growth of DeFi, with the increase in total industry assets under management in the sector 936% in one year, initiatives like this will help generate continued investment and growth.
After this period of education and growth, DeFi is poised to change the financial processes of the economy for the better. Much like the rise of the Internet, there will be several speed bumps along the way. Whether you’re on board or calling ‘baloney’ on DeFi’s rise to power, it’s clear the revolution is well underway.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.