There is a revolution occurring in the global financial system. The widespread innovation and adoption of FinTech and blockchain technology has changed the way we bank, the way we lend, and the way we invest. Everyone ranging from big banks, to bullish cryptocurrency investors, to one of the 1.7 billion people in the world without access to a bank, is adjusting to this revolution.
What is DeFi anyways? DeFi is an ecosystem of financial applications based on blockchain technology. The end goal of DeFi is to make financial transactions more secure, more accessible, more open, and without borders. In other words, DeFi is a global, more accessible, open alternative to everyday mainstream financial services. All you need is a smartphone and internet.
These are the five main characteristics of DeFi:
DeFi’s ecosystem allows transfers of value between people without the need of intermediaries such as a bank or financial institution. You as the individual are the only one in control of your e-wallet and funds.
These decentralized networks are global and borderless. DeFi is a “parallel” financial system with unlimited access.
The code behind DeFi applications is open and transparent for anyone to see and inspect. Because the code is so transparent, anyone can verify how a DeFi app and protocol works, and can track exactly where their money is.
The DeFi ecosystem consists of numerous blockchain based apps and protocols, and is built on open-source code. Because of this, developers can build on top of others’ applications, which accelerates innovation. In other words, these DeFi applications act as lego pieces which leverage each others’ value. If one user doesn’t like how one application is built, they can simply copy the code and build a new and improved app.
DeFi protocols are built on public blockchains such as Ethereum. Ethereum, and other public blockchains, are run by thousands of computers across the globe. In other words, there is not one central entity in control of the financial system- it’s thousands. Platforms are built to be managed by a community of users, and not centrally controlled.
In the beginning of 2020, the total value locked into the DeFi market reached approximately $680 million. As of today, the DeFi market is worth $6.68 billion- a growth rate of 982%– and 2020 isn’t even over yet.
Although DeFi has not taken over the global financial system yet, 2020 may have been a turning point in the growth of DeFi. In early 2019, there was only $275M of crypto collateral locked into the DeFi ecosystem. By February 2020, that number grew to $1B. February’s $1B subsequently more than doubled to $2.5B by early July. By mid July, DeFi’s value increased to $3B, and by July 25, hit $4B.
October also witnessed astronomical growth, despite many DeFi tokens suffering heavy losses. The DeFi sector’s user count increased in October by nearly 40%, from roughly 555,000 to 775,000. Additionally, another 85,000 users joined the DeFi ecosystem during the first 11 days of November, increasing the number of users by 11% in less than two weeks. In total, that means DeFi user numbers have grown 55% from the start of October.
Certain companies have been well aware of these changes, and have positioned themselves for the eventual mainstream shift to decentralized finance. Whether you like it or not, decentralized finance, or DeFi, is the wave of the future.