Crypto finance is going mainstream

Cryptocurrencies have made decisive moves towards mainstream adoption in recent years. A May 2021 report by New York Digital Investment Group showed that 17 percent of American adults owned at least a fraction of Bitcoin. Among millennials, nearly half own some form of cryptocurrency.

Moving at a much slower pace behind buzzy cryptocurrencies such as Bitcoin and Dogecoin is the notion of decentralised finance (defi). Billed as finance for the internet age, it boils down to the notion that anyone in the world can lend, save, invest and borrow blockchain assets. Unlike today’s financial systems, defi is run on peer-to-peer networks where financial transactions take place through smart contracts – programs on the blockchain that only run when conditions between the buyer and the seller have been met. The users define the rules of engagement, not the institutions.

Anyone have access

The advantages of defi are numerous. Without institutions having the final word on financial transactions, anyone can access banking services. The same permissionless feature applies to the developers who build on these decentralised platforms. There’s also the added benefit of transparency, as software built on these decentralised networks is open-source, and transactions on the blockchain are recorded for all to see.

Furthermore, defi promises the benefit of 24/7 accessibility, unlike traditional financial institutions. Instead of subjecting their financial history to the whims of a bank manager, a defi user could use their Ethereum tokens (the crypto that powers many defi protocols) as collateral for the loan.

Global adoption of defi would have a disruptive effect on our current financial institutions

And rather than opening a savings account with a paltry interest rate, a user could stake certain coins, earning interest rewards far beyond those determined by central banks. By adding your tokens to the blockchain’s liquidity pool, you provide the capital to power other defi services. Many of today’s blockchains operate with these so-called Proof-of-Staking models, an environmentally friendlier alternative to Bitcoin’s Proof-of-Work framework. The user (and their crypto) help serve as the infrastructure.

Disruptive effect

Global adoption of defi would have a disruptive effect on our current financial institutions, reengineering everything we understand about costly financial services such as transfers and global remittances. Banks are particularly exposed to risk – even digital-savvy banks still largely operate by a traditional set of rules. Not surprisingly, some banks have begun commissioning analysis studies and stating that it’s “time to cooperate” with defi.

Defi still has a steep barrier to entry though. It requires a high level of internet savvy to understand. Another downside is the inherent volatility of many cryptocurrencies. The Ethereum tokens you stake on a pool, for example, could drop 20 percent in value over the course of a week (although the opposite is also true).

As I write this, Defi Pulse reports that there are 83 billion USD of assets locked up in defi protocols. Q1 2021 saw 1.5 trillion USD worth of transactions settled with Ethereum, an amount that the venture capital firm Andreesen Horowitz noted represents 50 percent of Visa’s payment volume. Given the sheer volume of capital involved, it’s a question of when, not if, defi will start to play a central role in how we handle our money.