Why Is Everyone In Crypto Talking About DeFi?
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Why Is Everyone In Crypto Talking About DeFi?

October 12, 2020      Sofia Lee

Decentralized finance (DeFi) is the epitome of the crypto concept – the power to build financial solutions that rival conventional financial and banking services, albeit on a decentralized architecture. It means offering money-related services outside the purview of governments, authorities, and conventional rules. Sounds exciting, doesn’t it? No wonder millennials fed up with banks are thronging to invest in next-gen technologies.

 

The fight to stay truly decentralized has given birth to practical decentralized finance services. Today, crypto projects are viewed as a hedge against economic collapse. Investors look for dedicated decentralized solutions to safeguard their wealth against government defaults, economic uncertainties, and the deteriorating global geopolitical situation. Bitcoin has already shown its worth as a safe haven asset in COVID-19 times by outperforming stock markets.

 

What surprises the most about DeFi is its staggering rise. For example, tablecoin Dai has gained immense favor amongst traders, but adoption remains a concern. At present, 21,000 investors hold Dai, and it performs 13,490 transactions every day. On the other hand, decentralized financial applications are not fool-proof, as smart contracts can be hacked. Open-source code is vulnerable to hacking attacks. 

Rising ETH transaction fees

Skeptics of the movement don’t believe that DeFi will contribute significantly towards mainstream cryptocurrency adoption. Jeff Dorman of Arca asset management firm says that despite the technological prowess, the technology is not promising. He believes stablecoins built by established firms are more trustworthy, including Facebook’s Libra.

 

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Despite all the charms promised in a utopian DeFi future, there are risks along the way. Governments and authorities will likely get involved in one way or another. Besides, the whole crypto concept goes beyond just surpassing governments – it is about an entirely new financial ecosystem. So, it is best to learn to walk before dreaming of winning a marathon.

Rising transaction fees is one of the consequences of explosive DeFi growth. Smart contracts are getting more expensive to execute. After a certain level, it becomes illogical to pay enormous fees for simple, smart contract execution, and traders find it unviable to employ decentralized apps. Imagine paying $30 ETH for one transaction.

What’s in store for 2020 – probable trends

The crypto industry is known to resolve its problems in unique ways. So, current DeFi problems will be solved, but it remains to be seen how it would be done. Here are some probable scenarios:

  • As Ethereum moves towards ‘staking’ nodes and ditches miners, transaction costs will be crushed.
  • Ethereum’s network congestion issues will be resolved by fine-tuning the present apparatus and boosting computing power.
  • DeFi applications can shun Ethereum in favor of Ethereum-like platforms that are more attuned to serve investors.
  • Extensive improvements in coding can help re-engineer apps into lean, efficient performers consuming less computing power.
  • DeFi can leverage convention banking channels to drive costs lower and offer next-gen financial solutions to the traditional user base.

Smart investors will win the DeFi game

Remember, the DeFi horse has bolted, and there’s no going back now. Even though there can be potholes on the path, the horse has bolted to freedom land. Many first-time users define DeFi as an epiphany, and they aren’t treading backward anytime soon.

While some players will wither, major DeFi participants have seen what the future holds in store. The remaining 2020 will see incompetence weeded out, and dreamers chug forward. Just like Bitcoin millionaires, smart investors know the ‘buy-and-hold’ game better than losers.

Time will soothe the doomsayers who moan about the whole DeFi explosion. Investors can rest easy knowing that global dominance isn’t achieved without some bumps on the road to glory.

 

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Sofia Lee
Sofia Lee

Sofia Lee, an enthusiastic editor at Cryptopolitan. She loves to create wonderful write ups of real value that serve the Finance, Crypto, and business audience. Her hobbies are travelling and reading scientific stories.