DeFi, otherwise known as Decentralized Finance, has quickly been adopted into stable coins, banking, government, and even more areas of need in finance and asset management. DeFi also has great potential in developing markets, banking industries, SMEs (small to mid-size enterprises), and more. DeFi and blockchain based transactions have the potential to revolutionize many industries, starting from the first cryptocurrency, Bitcoin.
Timeline of the evolution of DeFi
The first Bitcoin created in 2009 > The first DeFi project based on a decentralized stable coin, DAI in 2014 > ICO using tokens became popular in 2017 > 2018, 2019, 2020 successful projects launched and new DeFi protocols created > 2022 more DeFi innovations such as interoperability protocols, cross-chain liquidity, credit delegation, collateralization and more.
5 essential points when it comes to knowing what DeFi is.
#1 Where, or which industries, can DeFi be applied?
DeFi, as mentioned earlier, can be applied to finance. DeFi can be applied to many sectors and sub sectors in finance, including, but not limited to banking, insurance, supply chains, healthcare, many crypto and blockchain-based companies, in addition to tokens and smart contracts. Most prominently, you can find DeFi as the creator of the cryptocurrencies with stable values, otherwise known as stablecoins. For example, many companies such as Stripe and Mastercard are developing crypto and stable coins to provide people with greater financing options. DeFi can be applied in many other areas today, such as interoperability protocols, cross-chain liquidity, credit delegation, collateralization and more.
#2 How long has DeFi been in existence?
Signs of DeFi appeared as early as 2009, when Bitcoin was first created. However, the term DeFi and the actual markings of decentralized finance was introduced in 2014, where the first stable coin, DAI, was created. Michael Kong, CEO and CIO of Fantom, explains the Evolution of DeFi during the Global DeFi Conference. Prior to 2018, applications of DeFi have appeared. Most prominently in 2018 was the “over-collateralized stablecoins” created from DeFi technology. Fast forward to 2021, DeFi protocols “forks and [deploys] on other chains, creating cross-chain dexes,” which allow DeFi apps to lower costs by removing intermediaries, increase transparency, gain faster settlement, automate transactions, increase productivity, among many other features. All in all, DeFi has been in existence for at least a decade. Now DeFi is gaining traction in financial markets, and we will be able to see more applications of decentralized finance moving forward.
#3 Can DeFi be used for Global Financial Inclusion?
DeFi has great leverage in developing financial inclusion. DeFi is able to “disintermediate traditional financial institutions,” helping people save on costs. Other financial inclusion abilities of DeFi involve helping people save on high rents, credit, and collaterals. For example, “DeFi liquidity protocols [can] use crypto as collateral to provide credit to consumers and, in turn, cut out the traditional banking middleman [to] provide attractive yields directly to savers.” During the panel “Using DeFi for Good and Pushing for Global Financial Inclusion,” leaders in the DeFi world delved into their experience and potential DeFi uses to advance financial inclusion. Midushaun Rhodes from the conference says that without official documents, under-privileged individuals are unable to open bank accounts. Rhodes believes that DeFi can help. For example, anyone can open wallets and store digital assets securely with DeFi. Financial inclusion means giving financial freedom to everyone.
#4 How can I manage my wealth using DeFi?
Maxim Galash, the CEO of Coinchange, during the Global DeFi Conference identifies DeFi as a “Democratization Facilitator,” meaning DeFi can drive capital through liquidity and decentralization. This leads into the conversation of how wealth can be accumulated using DeFi, either as passive income or another investment strategy. In an article on Entrepreneur.com, they identify 4 ways that DeFi can generate passive income. The first method is through staking, meaning you can lock tokens into smart contracts to earn more of the same tokens; the second is to “become a liquidity provider,” meaning you can swap between token pairs to earn a fee from the trades; third, you can receive tokens through “yield farming”; and fourth, lending tokens can gain you a portion of interest back.
#5 What is the future of DeFi?
With growing applications of DeFi, along with strong innovative potential, many leaders in tech have ideas on how DeFi would look in the future. For example, when taking collateral assets, DeFi can help with analyzing credit scores and assist in asset management. DeFi can also help with P2P insurance, which means issuing claims on smart contracts, enabled via DeFi technology. CEO Kong concludes that in the future, DeFi will need higher regulatory clarity to enable more people to understand and partake in the benefits that DeFi will bring, but also allow users to be aware of the risks. The CEO of Gather Network, Reggie Jerath, also says that companies adopting DeFi later on, would benefit from the simplification of DeFi terms to explain it to others, both on individual and corporate level, and also by establishing friendlier UX/UI design for the audience to navigate.
In conclusion, DeFi has great potential for growth, and the applications of DeFi today can help you save time and costs when it comes to establishing your personal financial freedom with resources available today. Even more companies, in addition to the two (Stripe and Mastercard) mentioned above, are creating stablecoins, payment and financing options for users of their platforms and more. The future of DeFi may involve higher regulatory clarity for businesses and financial institutions, as well as friendlier UX/UI design to assist the greater population access DeFi platforms. Additionally, to watch the replay of the two-day Global De-Fi Conference, you can click here. To learn more about DeFi and what you can do with this new technology, visit Innov-Edu for online courses!
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***This article is not meant to offer any tax, investment or trading advice. The author of this article is not a licensed tax, investment or financial advisor***
Austin, S. (2021, March 1). 4 Ways DeFi Can Generate Passive Income. Entrepreneur.com. Retrieved May 6, 2022, from https://www.entrepreneur.com/article/366908
Global DeFi Conference. (2022, April 27). Explore the Future of Finance. The Global DeFi Conference. Retrieved May 6, 2022, from https://globaldeficonference.com/#/
Jakub. (2021, May 1). History Of DeFi – From Inception To 2021 And Beyond. Finematics. Retrieved May 6, 2022, from https://finematics.com/history-of-defi-explained/
Levy, A. (2022, January 21). Defining DeFi (Decentralized Finance). The Motley Fool. Retrieved May 6, 2022, from https://www.fool.com/investing/stock-market/market-sectors/financials/blockchain-stocks/decentralized-finance/
Liao, R. (2021, July 19). How decentralized finance will transform business financial services – especially for SMEs. World Economic Forum. Retrieved May 6, 2022, from https://www.weforum.org/agenda/2021/07/decentralized-finance-transaction-banking-smes/
Raj, V. (2022, March 15). Has DeFi’s Financial Inclusion Moment Finally Arrived? Forbes. Retrieved May 6, 2022, from https://www.forbes.com/sites/vikasraj/2022/03/15/has-defis-financial-inclusion-moment-finally-arrived/?sh=6b8b46731168