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DeFi: The Next Wave in the Financial Revolution

by Pragati Shrivastava

In the last decade, the tech savvy generation has created financial products and services to disrupt legacy banking, but the real question is whether DeFi is the next wave in the financial revolution.

After the financial crisis of 2008, a wave of fintech startups began to provide financial products and services to a more tech-savvy generation that was disgruntled with the legacy banking sector. Mobile banking apps, peer-to-peer lenders, cheap payment and money transfer solutions emerged. Most of these products have a clear advantage over legacy banking solutions and that represents incremental improvements. A new wave of DeFi projects is attempting to kickstart the financial services industry revolution.

Bitcoin pioneered what we now refer to as decentralized finance, of “DeFi”. It was the first decentralized, open-source digital payment method of its kind. After the historic bull run of 2017, following by a long crypto winter, Bitcoin enthusiasts are using it as a safe haven, or a store of value; in essence, ‘digital gold’. In the meantime, Ethereum is moving away from the altcoin narrative and fast becoming a hub for the nascent DeFi ecosystem. Trustless Derivatives trading, tokenization of assets and decentralized lending protocols are made possible by blockchain-powered smart contracts.

DeFi applications have made it possible for anyone with an active internet connection to gain access to basic financial services such as borrowing and lending. These platforms empower individuals to be a part of the global financial markets.

Will DeFi platforms become the new bank?
While the latest DeFi applications have generated considerable excitement and reduced bureaucracy, offering a wider choice and lower fees, mobile banking and P2P is gaining a foothold in the market, especially with millennials and the younger generations. A significant number of fintech startups are striving to be the next generation bank. These initiatives are beginning to crop up with projects like Robinhood, Stripe, Coinbase, Affirm, and Acorns.

A banking license comes with regulatory restrictions and red tape that is holding back banks from providing innovative, accessible financial products and services. This makes it challenging for fintech startups to get into the banking sector. Conversely, DeFi may be the innovation that we are missing in the industry. If there could be P2P and more effective banking at a fraction of the cost, there would be no need for a bank. If someone could invest in tokenized assets or stake coins to earn interest while remaining in complete control of the funds, we would be one step closer to the bank of the future.

Is DeFi Ethereum’s secret sauce?
Currently DeFi Apps are built almost exclusively on the Ethereum Network. However, with the network’s scaling issues, the regular pushback of planned upgrades, and increasingly aggressive and innovative competition, Ethereum may be on borrowed time. The price of Ethereum is rising in a pattern similar to the previous alt season and some under-performing competitors such as EOS, XTZ and DASH are still lagging even as Ethereum is trading around $209.

Fortunately for the ETH community, the rise of DeFi has increased interest in Ethereum and sent the price above the psychological level of $200. The combined market value of leading Ethereum-based DeFi projects with their own ERC-20 token include Augur (REP), Gnosis (GNO), Kyber Network (KNC), MakerDAO (MKR and DAI), and 0x (ZRX) stands at around $800 Million.

The future of DeFi
Whether DeFi will remain restricted to Ethereum or move on to more technologically-advanced blockchains remains to be seen. Innovations in DeFi are becoming more disruptive than what the “traditional” fintech sector offers. The same challenges of scaling, capacity and application are being tackled more effectively by the blockchain.

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