Let’s Face It: There’s No Denying the Power of DeFi

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It’s easy for onlookers to dismiss decentralized finance (DeFi) as an idealized dream pushed by crypto-bros and enthusiasts rather than something truly innovative. After all, the traditional finance world offers all sorts of ways to manage funds — why should the mainstream care about a complex new way of doing things?

Well, what those onlookers fail to consider is that Defi is more than a dream. It’s a movement that’s already being realized.

According to DeFi Pulse, more than $75 billion is locked into DeFi protocols as of March 9th, 2022. But what makes DeFi so compelling? Why are so-called financial experts leaping into the emergent space? Well, there’s the removal of an intermediary to start.

Complete Financial Control

The main problem with banks and other financial institutions is custodial. By holding our money in banks, we’re subject to the mercy of a third party. Banks can control what we spend on, deny bank accounts to those they deem unworthy, and can give businesses a hard time with fees and similar issues. All of this isn’t to mention that money transfers can take days, if not weeks, depending on the time of initiation. In today's digital, instantaneous world, many won’t stand for that.

DeFi platforms, in contrast, are decidedly non-custodial. Anyone can open an account (a wallet), deposit as little or as much as they’d like, and participate in the network’s various applications. There’s no intermediary requiring minimum payments or dictating their spending habits. On top of this, the lack of an intermediary means more money for the users—those who actually own the funds in the first place.

Decentralized lending and borrowing platforms offer all sorts of benefits over traditional finance. For one, lenders can earn much more annual interest on a DeFi platform than with banks. According to the FDIC, lenders earn an average annual interest rate of less than 1%. Depending on the lender’s token of choice, users on Aave can earn anywhere from 1% to over 17% annual interest on their lending.

Borrowers benefit, too, with the ability to customize their minimum payments and the length of the payback period. Instead of dealing with a corporate entity, the borrower and lender can communicate one-on-one and work out something that’s best for both of them.

A 2019 FDIC study noted that 29% of unbanked US households don’t meet the minimum balance requirements for a bank account. 16.1% of those households claim they don’t trust banks as a reason. While those numbers are sure to have altered since there’s a real audience for decentralized finance applications. And this isn’t to mention the millions of people outside the US with similar experiences.

Extending Beyond Banking

DeFi extends beyond banking and lending capabilities, too. There’s a swathe of applications available in the DeFi space ranging from gaming to social platforms and so much more.

Gaming DApps, for instance, offer players the ability to earn from their game time. Applications like Axie Infinity or Splinterlands are tokenized versions of typical video games, with the difference being their ties to the Ethereum platform. By earning tokenized in-game assets, users can then convert their winnings to Ether. Ether can then be used within Ethereum’s DeFi ecosystem or cashed out to the user’s local fiat. 

This isn’t some new revelation, either. According to DappRadar, blockchain-based games generated $480.7 billion in transactions in 2021 alone. Bloomberg also reported that about 50% of wallets connected to DApps in November 2021 were to play games. Who knows what these numbers could reach in 2022?

All of this said, these systems are still developing, and the current risk is palpable. For every legitimate DeFi project, there are dozens of scam ones. Even so, projects with the best intentions might not generate the proper interest, and investors who spent thousands betting on said project could be left hanging.

This new market is enticing, no doubt, and it presents a promising future once a lot of the kinks have been worked out. However, no one is saying we should move all of our money to the crypto space just yet. And if they are, they’re probably not someone we should listen to. It’s best to only invest money we can afford to lose, as that money will go toward developing something that can benefit everyone. It’s only a matter of time.


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