By Georgia Rakusen, ConsenSys
In spite of its ever-growing popularity and amplified discussion, there is a certain resistance keeping blockchain outside of mainstream finance. Institutional investors and banks alike remain concerned over issues such as the regulation of digital assets, the failure of Bitcoin to evolve as a unit of account, medium of exchange and the lack of central bank guarantees. Their journey towards digital currencies is one of caution and conservatism. This narrative must change in order for blockchain to become part of the mainstream conversation. DeFi has the capacity to bring about this change. DeFi promises to propel blockchain into financial commonplace by establishing trust, banking the unbanked and providing real-world applications for blockchain technology.
Recent times have seen several big players venture cautiously into the crypto space which present important milestones for the digital asset industry. DeFi is making sure that the wider, general public can participate in and benefit from this journey of blockchain adoption. It is doing this by building trust for retail users. Users require belief in a financial system and its infrastructure otherwise there is no foundation for customers who regularly hear of negative publicity such as hacks and loss of codes. As with crypto in general, trust is established by education and experimentation.
DeFi allows for such experimentation. Users continually test the reservations they have and investigate flaws. The collaborative nature of DeFi, also known as ‘Web 2.0’ allows for users to establish their level of trust in blockchain by sharing experiences, accessing records and analyzing data. Although a smart contract might be “trustless” — in as much as no human needs to be trusted — users who are unable to audit a contract themselves will seek validation from the community and people they are engaged with.
Despite rapid advances in our global financial systems, there remains a staggering 2 ½ billion unbanked people worldwide. Financial systems that promise decentralized finance hold significant mainstream appeal for this cohort. The DeFi alternative to central banks and third parties means previously unbanked people could now buy, sell and lend products and securities. By replacing western infrastructure with DeFi, users have control over their financial interactions, engaging instead with software and smart contract “code as law” set-ups. These strides may not solely improve regional economies, but may advance social issues which are compounded by such large unbanked populations, including the large numbers of unbanked women in particular and unserved rural communities.
Practical Applications of DeFi
The pipeline of real applications that DeFi presents is further driving the mainstreaming of blockchain. DeFi is revolutionizing traditional financial instruments such as interest-earning accounts and loans and eliminating centralized systems and the need for third parties.
Collateralized Debt Positions (CDPs) are a great example of such an application. CPDs are smart contracts which run on Ethereum. 95 percent of CDPs are opened for testing purposes alone. We know this because (at the time of this article) their value is below 0.0058ETH comparable to just above one dollar in value. The remaining 5% of CDPs, according to ConsenSys Codefi’s survey, are collateralized at an average of 1,000 ETH (US $4.5m) making their use at scale desirable to crypto whales and early crypto investors.
This CDP application of DeFi stands as an attractive alternative to slower, costly, traditional money transfer solutions. DeFi in this instance provides near-instantaneous, immutable, inexpensive transactions and removes third parties.
Despite its undeniable role in the future of finance, there remains barriers to blockchain proliferation on a mainstream scale. DeFi is continually breaking down these barriers through effective use of the technology. DeFi stands to disrupt and revolutionize established financial networks and systems and change the industry for the better. The tools to build the future of the industry are in our hands.
The recent DeFi user report by ConsenSys Codefi finds that Cryptocurrency holders (referred to as “hodlrs”) are more often interested in the underlying technology and its practical application and how it can be applied for practical means. Hodlrs remain cautious while experimenting with DeFi, follow online discussions, and share their experiences. Users will often try out a protocol with a small amount before investing anything larger.
See the recent DeFi User Research Report for more findings.