The cryptocurrency industry continues to expand and new applications are emerging. For a few years in a row, digital assets managed to grow in popularity, on the back of increased adoption of blockchain technology and its potential benefits for the global economy.
Skeptics continue to show their distrust, yet cryptocurrency valuations are rebounding after several months of selling. Bitcoin reached $51,000 for the first time since May 2021, driving interest in the wider cryptocurrency market as well as speculation on price movements. But if you’re interested in crypto markets, you should also pay attention to Decentralized Finance (DeFi). It has the potential to create disruptions in how the financial industry might work in the future, making a focus on its basics important.
What is Decentralized Finance?
Decentralized Finance or DeFi is an alternative finance ecosystem where consumers can transfer, trade, borrow, or lend cryptocurrencies, independent of any traditional financial institutions. It is a technological infrastructure that makes digital currencies circulate among people and businesses that want access to funding, regardless of purpose.
The DeFi sector is growing and now there are hundreds of DeFi tokens in existence. Uniswap is currently the largest one, with a market capitalization worth over $17 billion. Chainlink is 2nd in global rankings with a $13 billion market cap, followed by Terra with $12.5 billion.
Same as any other cryptocurrencies, DeFi tokens have a floating value, depending on demand and supply. That means trading crypto price volatility is possible, expanding the list of potential uses of DeFi. However, as will be highlighted in the next section, there are both upsides and downsides associated, and any person interested should be aware of them.
Pros and Cons of DeFi
One of the main benefits associated with DeFi is the removal of intermediaries between parties in a financial transaction. In a traditional system, users are dependent on banks, brokerages, and other entities that facilitate transactions. In DeFi, the middleman is removed, contributing to lower costs.
At the same time, blockchain technology can enable fast transaction processing. This has been an issue for a long time, especially when it comes to cross-border transactions. DeFi disrupts the monopoly owned by companies like SWIFT and unlocks new options for the wider public.
An aspect that can be both a benefit and downside has to do with the lack of regulation in the cryptocurrency industry. Financial regulators that generally oversee the traditional banking sector are not yet in charge of digital assets, creating an environment where some companies might conduct fraudulent activities. All the largest DeFi tokens are now established brands and benefit from their consistency, but that has not been the case with all entities from the sector.
Does the future belong to cryptocurrencies?
Whether or not the future will be about cryptocurrencies is still not sure, but the world is clearly moving towards a deeper integration of advanced technologies and the financial industry can go through significant changes. Further developments in the DeFi sector can provide benefits for companies and the global consumer base, in the form of lower costs, increased security, transparency, and fast transaction processing.
