DeFi, standing for decentralized finance, is a market sector that arises from the intersection of blockchain and financial services. While this industry is fairly new, its total value has been growing consistently over the past several years. After hitting the impressive $1 billion mark in 2019, this value has soared to reach over $72 billion by February 2021.
Towards the end of 2021, this value reached upwards of $170 billion dollars, demonstrating the boosted interest that this field is currently seeing. At its core, this industry is related to any financial system or application that relies on blockchain and, by extension, cryptocurrency.
The ‘Decentralized’ part of this phrase means that these systems do not have a connection to centralized systems, like banks or governments. Instead, they provide their own space where peer-to-peer transferring is much more common, not needing to be routed through a central space.
With this different approach to finance, DeFi instills a further level of anonymity and accessibility, as this system is open to absolutely everyone. While DeFi started with routes in cryptocurrencies like Ethereum, this system has expanded to encompass whole ecosystems, with cryptocurrency being only the beginning.
In this article, we’ll be taking a look at some of the main innovations that are currently at the forefront of DeFi, demonstrating how continual progression is pushing the bounds of this ecosystem further than what was ever thought possible.
What Innovations Are Pushing the Growth of DeFi?
DeFi is continually experiencing a wave of growth, with the total value of all assets increasing and the number of users that utilize one or more dApps skyrocketing. While one could consider the rising popularity of DeFi as aligning with the development of Web3.0, with more users seeking user-forward systems, there is actually more to the story.
There are several factors that are playing into the boom that DeFi is currently experiencing:
- High Accessibility
- The Development of Yield Farming
- Infrastructural Developments
While each of these has a certain impact, Infrastructural innovations are contributing most to the rapid growth of DeFi. Let’s break these ideas down further.
One of the factors, perhaps even the most important one, that is playing into the success of DeFi is the fact that it is accessible to absolutely everyone. As this factor continues to become integral to the operation of DeFi, more and more users are turning to DeFi solutions to house their regular finance.
While centralized financial systems often require a range of documents to access (a permanent address, for example), DeFi systems are accessible to absolutely anyone with a smartphone. Considering that 83.72% of the world’s population own a smartphone, the extent of this access is moving to a never-before-seen level.
As anyone can start using DeFi systems, no matter who they are or where they are in the world, this blockchain technology ensures that accessibility will never become a barrier to entry like it often is within centralized systems. Especially in countries like Venezuela where accessing banking institutions and exchanging money is difficult, DeFi has become incredibly popular.
The Development of Yield Farming
Within dApps and blockchain systems, users can add any proof-of-stake cryptocurrency that they own into staking pools. For those that aren’t familiar, proof-of-stake is a consensus mechanism where every single transaction is verified and processed into a data block on the blockchain.
By providing cryptocurrency to these liquidity pools, users are actively providing the power behind this proof-of-stake mechanism. Due to their helping hand, DeFi systems reward the user with an annual yield, with high percentages offered when users keep their funds in the pool for 30, 60, 90, 180, or 360 days.
Especially considering that the U.K. just hit the highest inflation rate in 30 years at 6.2%, and the U.S. has already eclipsed this at 7.9%, people are looking for inventive ways that they can start to save money. As they’re losing money at a historically unparalleled rate when money just sits in their banks, users are seeking new methods of gaining interest on their funds.
With incredibly high yields for staking in liquidity pools, DeFi has positioned itself as the answer to these problems. As financial crises around the world continue to rage on, DeFi acts as a soothing solution that helps people take back control of their money.
What’s more, considering that yield farming is a passive pursuit, people are able to convert their cryptocurrency into a stream of passive income.
Alongside fundamental mechanisms which continually demonstrate the value of DeFi to the general investor, these systems are continually innovating and reinventing themselves in order to provide new benefits.
One of these said systems, DeFiChain, which is a decentralized proof-of-stake blockchain, is seeking to take what DeFi can do one step further. One common pitfall of DeFi that investors looking for diverse investment options encounter is an inability to easily invest in stocks.
The typical pathway for someone to invest in stocks from DeFi would be:
- Transfer cryptocurrency from your DeFi wallet to a global exchange.
- Exchange this cryptocurrency into a fiat currency.
- Withdraw the fiat currency from the exchange and into your bank account.
- Send the money from your bank account to a stock brokerage platform.
- Invest in your stocks of choice.
Not only is this process arduous, but it can easily take two or three whole days before you’re able to invest in a stock. At that point, the price you were tempted by will have long been lost.
To fill in this point of frustration within DeFi systems, DeFiChain has created a system where users are able to buy tokens that mimic the value of stocks using cryptocurrency directly from their platform.
Instead of having to move money about and get wallets involved, all you have to do is select a stock and buy it directly with a cryptocurrency conversion, making this a one-step process instead of a multi-step ordeal. By buying decentralized tokens that mirror the price of commodities, stocks, and indices, DeFiChain has successfully made investment opportunities that were once beyond the reach of DeFi a working reality of their blockchain platform.
With DeFiChain, users are able to create a diverse investment portfolio from one location, creating a financial investing system that suits the needs of every investor. What’s more, any dTokens that the user has associated with their account can then also be put towards liquidity mining, allowing them to get even more rewards on their investments.
Innovations like these further demonstrate that DeFi is not just a trend; it’s an established system that millions of people around the globe are turning to. As more features are added to the DeFi ecosystem, the appeal will only grow stronger.
Growing continuously since 2017, DeFi is an impressive system that’s set to radically change how the financial world operates. Moving away from web 2.0 financial systems that often hinder the user, DeFi represents a step into web 3.0, where users have more power over their own finances.
Due to the advanced infrastructure of the blockchain, DeFi is seeing millions of users around the globe flocking to its platforms. As further innovations, like DeFiChain, are established and the possible utility of DeFi increases, we’ll only see further growth of this system.
Only time will tell if DeFi is effective enough to completely topple the commercial hold that centralized systems have on modern banking. But, with current progress, things are looking positive for DeFi.