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DeFi Evolution For Finance Liberation: Future Wave Of Financeby@rajdeep
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DeFi Evolution For Finance Liberation: Future Wave Of Finance

by Rajdeep SinghOctober 11th, 2022
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Decentralized finance (DeFi) enables consumers to carry out financial transactions directly without the involvement of middlemen. Operationally, this is made feasible via blockchain, a unique type of shared, unchangeable database upon which cryptocurrencies were founded. DeFi is a new ecosystem that claims to provide transparency and control, partly attributed to the underlying blockchain's integrity protection and current financial asset yields greater than CeFi. According to Debank, DeFi has a net worth of over $60.5 billion.

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Cryptocurrencies have constructed a digital “clone” of the conventional financial world.


Decentralized finance (DeFi), which enables consumers to carry out financial transactions directly without the involvement of middlemen, may reach a turning point in 2022. Operationally, this is made feasible via blockchain distributed ledger technology, a unique type of shared, unchangeable database upon which cryptocurrencies were founded. Blockchain enables several parties to monitor a transaction, preventing it from being in the hands of a single central authority.


The Conventional Centralized Finance (CeFi) ecosystem may appear mysterious to non-experts since customers frequently aren't aware of the agreements or laws that govern financial assets and goods. However, Decentralized Finance (DeFi) is a new ecosystem that claims to provide transparency and control, partly attributed to the underlying blockchain's integrity protection and current financial asset yields greater than CeFi.


Stats Revealing DeFi Evolution

  • The DeFi sector is the third-largest sector in DACS, with more than 110 assets representing 2.2% of the digital asset market worth approximately $24 billion in market capitalization.

  • The Decentralized Autonomous Organization (DAO) and Credit Platform industry groups represent 13.7% and 13.2% of the sector’s market capitalization.

  • Active DAO is the largest industry by market capitalization under the industry group, with 10 assets totaling $2.5 billion, followed by DAO (Other) and DAO Builder.

  • 13 industries inside the DeFi sector feed into eight industry groups.

  • Exchanges are the largest industry group under DeFi, with 33 assets and $12.1 billion in market capitalization.


DeFi Development In Subsequent Years

DeFi is an innovative new idea that aims to duplicate or enhance the capabilities of established financial institutions, including banks, payment processors, and more. It is an ecosystem of blockchain-based financial products that is quickly spreading.


DeFi is presented as a solution to traditional banking and financial institutions' issues, demonstrating how it may ultimately replace the outdated system in real time. DeFi solutions are created to do away with middlemen between parties engaged in transactions, regardless of the technology or platform employed.


This idea is here to stay, as seen by the exponential growth of trading tokens and money trapped in smart contracts in its ecosystem. According to Debank, DeFi is now locked with a net worth of over $60.5 billion.


Embrace the wide range of DeFi Development services and solutions offers a user-friendly method for handling financial transactions. As the name implies, it is not subject to governmental control or modifications by centralized financial institutions. Users now have total control over their transactions and no longer depend on other intermediaries.


They may maintain anonymity because all transactions are handled through blockchain-based smart contracts. Due to the financial inclusiveness that cryptocurrencies provide, transactions and trading may occur anywhere.

How does DeFi work?

A DeFi protocol uses smart contracts, a computer code operating on the blockchain network. Most DeFi projects include open-source code accessible to everyone around the globe. Users of the DeFi protocol may use their wallets to connect with these smart contracts, transfer money, borrow money, lend money, or use any other DeFi service.


Decentralized crypto, synthetic stock markets, quick and affordable access to finance are all features of DeFi initiatives on the blockchain network. Some DeFi projects, like Uniswap, have developed into effective worldwide financial marketplaces that serve individuals and institutions because of their decentralized character. In addition, DeFi also eliminates intermediaries and enables cheaper and more effective financial services.


Transactions can be easily viewed with a working internet connection because DeFi runs on a blockchain network and is typically open source. As a result of its immutable nature, blockchain data cannot be altered after it has been added to the network. As a result, a code-based, the trustless financial system is created. A Decentralized Exchange (DEX) is one illustration of this.


DeFi Regulations


There are a few nations where specific isolated incidents are being taken into account by the country's governing authorities, even if there are no clear regulatory rules on DeFi-related issues. DeFi may have a lot of potential, but it also poses some interesting policy and regulatory questions.


To completely control financial markets and associated activities, US financial regulation presupposes the existence of intermediaries and applies the legislation to intermediaries. Regulators and policymakers could therefore discover that DeFi can take them into unexplored, untested areas.

The Dream Of DeFi

In a decentralized financial system, access to financial services requires an internet connection, not location or circumstance. Increased openness, lower costs, and fewer opportunities for censorship and/or manipulation would result from decentralizing those who own and control the infrastructure supporting financial markets.


DeFi would introduce new financial products and markets and facilitate the existing markets for illiquid financial products. More institutions would join the movement if they could arbitrage, borrow, hedge, and access liquidity more successfully without being limited to only using these markets and products.

The DeFi Truth

The truth is that these products aren't aimed at the mass retail investor, let alone the global "unbanked," even though DeFi is referred to as "open finance" and is occasionally promoted as a way to "bank the unbanked." Technology isn't usually the main barrier preventing access to financial services. Identity and/or oppressive rules are frequent.


On the retail side, it is improbable to think that the typical retail investor would comprehend the risk profile of even the most straightforward DeFi products. I have yet to hear a convincing justification for why the typical retail investor would require access to exotic financial derivatives. UX/UI issues furthermore hamper retail adoption.

Why is Defi Widely Accepted In Different Industries?


Technology has the potential to save billions of dollars by reducing transaction costs and boosting business efficiency. Defi also contributed to the changing industries scenario in several ways;


Banking and Finance

Defi is considered at an early stage, still holding the future by increasing financial services and reducing the barriers to providing services such as buying, selling, lending, and borrowing crypto assets. Financial institutions can omit charges levied at various levels.


Insurance


During the pandemic, insurance companies only suffered  $40 billion in yearly losses for handling claims. Defi has the ability to handle claims flawlessly with the power of blockchain-based smart contracts. Everything can be managed with automatic claim handling and underwriting of policy. Moreover, blockchain helps to detect fraudulent activities across industries using customer data.

Supply chain


Supply chain providers have to process large amounts of data such as goods location information, quality certification, quantity, and more to enable effective transfers. DeFi provides greater transparency from the product’s origin to conventional supply and keeps the data secured.


Healthcare


Today, the modern Defi market is $8.9 billion (approx). When interacting with healthcare, it has the potential to grow into trillions. According to Cointelegraph post, the Global healthcare market potential for Defi involves consumer medical devices financing worth $31.4 billion in 2020, professional facility devices financing $456.9 billion, medical malpractice insurance $14.56 billion, and drug discovery & research $ 186 billion.

Challenges That DeFi Needs To Overcome

DeFi has the potential to surpass various benefits over centralized finance; somehow, it needs to focus on overcoming some practical industry challenges. Have a look at some pertinent challenges below:


Identity & Reputation


To enter the DeFi world, financial transactions require proper identification of the platform's parties. Violations of KYC/AML regulations often result in criminal charges with a huge fine. DeFi Relayer is an entity that hosts on a DeFi protocol to create an exchange between unknown parties. There can be serious consequences if any of those parties violate any regulations.


Many DeFi projects are working to find the complete solution to have KYC without any centralization. Various parties use EIPs (Ethereum Improvement Proposal) to integrate KYC/AML into the ERC-2- tokens. This requires service providers to work off-chain to review KYC policies; however, they are unclear if they fully satisfy regulatory requirements.


Capital Inefficiency


DeFi projects' excessive collateralization requirements are capital inefficient. Most consumers still decide to maintain a loan-to-value ratio of 300 percent to avoid paying liquidation penalties in the double digits. The business claims that the 2x collateralization ratio required by the compound will go down over time. Some users, however, were prepared to post 4x–5x the necessary collateral.


There isn't much choice except to mandate people lock up excess cash, diminishing the value of taking out these positions until a decentralized reputation system is built. Even after/if reputation problems are resolved, the underlying positions' volatility may continue to favor over-collateralization.


Network

Since the bulk of existing DeFi solutions is built on top of the Ethereum network, the success of DeFi is reliant on its scalability and usability. Although the usability dispute is well known (and covered below), Web 3.0 is still difficult for ordinary users to understand.


The modularity of Ethereum-based protocols results in higher switching costs and increased network vulnerability. As more projects incorporate Ethereum, it will become increasingly difficult for you to change the foundation layer protocol and maintain backward compatibility.


Undefined Monetization


Although there are many choices, most DeFi initiatives have left their monetization strategy "unknown" and instead concentrate on establishing the protocol's overall incentives. But if these initiatives continue, they will eventually need to make money.


The majority of the time, a native token monetization strategy adds more resistance to user adoption. It might not be appropriate for other projects. For instance, networks whose ownership/voting percentage can be established by participation, which is recorded on-chain, don't benefit much from a token monetization model.


Oracles


Various DeFi projects approach oracles differently, but most use MakerDAO oracles. It is currently designed for single collateral stablecoin Dai, but it will be redesigned to support multiple Dai. MakerDAO uses an oracle security module that lets the second protocol layer start an emergency shutdown. If it happens, users can easily convert Dai to ETH as per the ledger's state.


Regulatory Burden


The main issue for industry regulation is related to how existing regulations are applied to blockchain networks and cryptocurrencies. Many techies or startups in the industry are confused about launching as it is unclear to operate in the regulatory environment, and its costs are very high. Sometimes, the burden is so huge that some entrepreneurs don't have enough investment to launch properly.


Protocols Risks


There is a huge difference in the fundamental characteristics of blockchain-based and traditional markets. DeFi protocols provide high interdependency along with faster innovation. So, it is difficult to understand the risk profile of DeFi products in combination. Every project has its own risk models, but the complexity of analyzing these protocols is not sure.


Most Prevalent DeFi Properties


Public Verifiability


The execution of the DeFi program and its bytecode must be openly verifiable on a blockchain, even though the DeFi application code may not always be open source. Any DeFi user can examine the DeFi state changes, and their proper execution can be confirmed. This unparalleled level of transparency makes it possible to inspire confidence in the DeFi development system.


Custody


DeFi gives users easy access to manage their assets anytime (there is no need to wait for the bank to open). However, enormous power also entails immense responsibility. Users typically take on technical risks unless insurance is underwritten. As a result, centralized exchanges— which function similarly to traditional custodians— are often used to store cryptocurrency holdings.


Privacy

DeFi only exists on blockchains that support smart contracts but don't protect user privacy. Thus, these blockchains only provide pseudo-anonymity; they do not provide true anonymity. Blockchain addresses can be grouped together, and transaction data can be tracked, as demonstrated by a large body of literature. Since centralized exchanges with KYC/AML policies are frequently the only practical way to convert between fiat and cryptocurrency assets, these exchanges have the capacity to reveal address ownership to law authorities.


Costs of Transactions

Blockchains in general and DeFi specifically need transaction fees to avoid spam. However, in CeFi, financial institutions have the option to provide free transaction services (or are required to do so by governments).  Due to their capacity to rely on client KYC/AML verifications, some services are offered for free.


Deployment

Even the team that created Bitcoin has remained anonymous to this day, and many DeFi projects are developed and maintained by anonymous groups. Once installed, the DeFi smart contracts are run by the miners implicitly. Without a front-end, anonymous DeFi projects can operate, forcing users to communicate with the smart contract directly. Alternatively, a distributed storage service like IPFS can be used to serve the front-end website.


Embrace The Change With DEX Boom!

In recent years, Decentralized Finance has significantly changed the financial sector. As a result, dis intermediate has become the main concept behind transactions on DeFi and Decentralized Exchanges on the Blockchain network. DEX users directly use blockchain technology to manipulate transactions or accept other services.


The non-custodial design of the DEX allows users to retain coin ownership and full control over the assets in their wallets. DeFi and DEX use smart contracts and self-governing software on a blockchain network. You'll realize how it affects your financial transactions after comprehending how DeFi alters the financial sector.


Wait until you understand where the transformation is taking you before taking control and overhauling all of your financial transactions in the DeFi sphere.