Cryptocurrency seems to be the topic of everyone’s conversation these days. However, it is difficult to generalize the technology and its potential. On the one hand, you have Bitcoin, the original cryptocurrency that first gained attention with a white paper in 2008. Since then, Bitcoin has rapidly grown as a digital store of value exceeding 1 trillion. dollars in market capitalization and forcing banks, traditional financial institutions and even crypto. – skeptics of taking it seriously.
On the other side of the spectrum are smart contracts and decentralized finance (DeFi). Still in the early stages of their development and years after the adoption and acceptance of Bitcoin by the mass market, smart contracts and DeFi have the potential to be even more valuable given their many use cases and of their potential for digitization, democratization and transformation of global finance.
But why should you care about DeFi, even if you never intend to care or own Bitcoin? Because it can change the future of financial services.
Think about how financial products are sold and serviced today: When you go to a bank or lender, you are complying with their rules and prices, often with limited transparency. These financial institutions control the doors, and we are obligated to trust them and their policies. This trust is easy (and important) to have in some countries but not as evident in others with high rates of inflation, corruption and a monopoly banking infrastructure. In these markets, people often do not have access to a safe and stable place to deposit their assets, borrow money, or even make long-term investments.
Enter DeFi, which essentially allows financial services to operate in a fully open, borderless, widely accessible and transparent digital form – as digital smart contracts hosted on a transparent blockchain and secured under a clear set of rules.
The power of such an open and distributed system is often underestimated. However, its potential has been proven in other use cases. Think before the Internet or Wikipedia when researching a topic required a trip to the library or a 32-volume set of Encyclopedia Britannica. Expensive and inaccessible tools that could quickly become obsolete.
Today, Wikipedia is visited over 3 billion times each month and is not only free, but contains more detailed and real-time information than a library. It is accessible to anyone in the world with access to the Internet. Finally, its accuracy is almost guaranteed because, if false information is released, the community, led by a mechanism of full transparency and consensus, revises and corrects it promptly.
It’s the same basic concept as a blockchain. Wikipedia is a simple example, but the digitization of information has led to a massive dissemination of knowledge and a collective intelligence far more powerful than any centralized organization. DeFi protocols create that same open ecosystem for financial services by fully digitizing valuable assets and decentralizing and automating the interaction between those assets.
DeFi is more than just a concept. We’re still at the start of the rounds, but there are hundreds of protocols in operation with a blocked actual value which cannot be ignored. In total, DeFi has reached a combined market cap of $ 148 billion, and these protocols have held more than $ 90 billion in assets stranded this year in smart contracts. Against just $ 18 billion at the start of this year. There is real traction and real value on these platforms, beyond the exaggerated market caps that you can see in other cryptocurrencies, like Dogecoin. On this scale, DeFi is more than a passing fad.
The use cases are also very real. Today there are working protocols that allow you to send money around the world, transfer currencies, earn a return on deposits, borrow or lend, all in a decentralized way. .
The backbone of DeFi is a stable coin, essentially a token digital dollar that holds the exact value of its underlying fiat (a US dollar for example) – providing users with the benefits of digital currency without the price volatility. Today, the largest stablecoins are Tether (USDT), USD Coin (USDC) and white label stables for large exchanges like Binance Coin (BUSD) or Huobi Coin (HUSD), both of which are administered by Paxos, an Oak HC / FT holding company. Going forward, any financial services, fintech, or payments company could offer their customers their own fiat-backed stable coin for personalized use cases.
These stable coins can be minted or exchanged for their underlying asset at any time. Most importantly, they provide a digital representation of a dollar for easy portability. They are powerful for many use cases of cross border payments. Although the United States dollar bill is largely in digital form today, it is still controlled by the Federal Reserve and the corresponding banking network, which limits ease of access and portability to users. of the whole world. For example, if you were to send $ 1 to another country today, multiple correspondent banks would have to transfer that dollar and verify the sender and receiver every step of the way, which takes up to three days and limits the accessibility. With a stable coin, the value of the $ 1 can be transferred and held anywhere in the world, while the physical $ 1 remains in a single custodial bank account as a backing.
Mass market adoption is already happening in many countries and regions, with Southeast Asia being a prime example. Tether, a stable USD coin is used in daily P2P payments, remittances and even accepted at 7-Eleven. It has replaced the local currency in many use cases. Many global payment and money transfer platforms have discussed the use of stablecoins to improve global currency movements.
You can also go for a DeFi lending protocol like Compound or Aave, and sometimes earn up to 8% on a USD-backed stable coin. The same USD would earn you 50 basis points on a high yield bank savings account. You can also take out a loan in USD without having to be integrated and approved by a bank.
Decentralized lending and cross-border payments are just the start, but DeFi’s greatest potential is to democratize access to finance in emerging markets, closing the doors that traditional centralized financial institutions have erected. DeFi also promises to allow anyone with an internet connection in the world to access any global currency, earn a return on deposits, or instantly access loans. In some emerging markets, even having access to a stable dollar-backed currency is revolutionary. Ultimately, DeFi will create a digital exchange ecosystem where money and value is transferred just as information and data is transferred today, seamlessly in the background from point to point, where Use cases are not limited by the functionality of the infrastructure.
There is still a long way to go, especially to improve unemployment insurance and regulatory frameworks. But don’t be surprised if, over the next five years, DeFi is something we can all interact with every day.