Not all changes (e.g., climate change) are good ones. But when it comes to finance, the arrival of crypto-currencies, or even DeFi (for decentralized finance) seems to draw a more inclusive future. This is good news, especially when you consider that more than 2 billion adults worldwide are excluded from the banking system.
While regulators have seen the rise of DeFi as a risk to traditional finance, it has also been shown to bring major benefits. In the past 18 months, more than $80 billion in capital has been injected into DeFi protocols. The future of finance is undeniably on the move.
If more and more investors and individuals prefer to fund a DeFi platform than a traditional bank account, it’s because they believe that the benefits outweigh the risks. Before deciding whether to follow suit, let’s dive into the key features and challenges surrounding crypto and decentralized finance. Let’s see what the future holds for this innovative FinTech vertical!
What would a world in which decentralized finance is the norm look like?
Decentralized finance – often referred to as DeFi – refers to the shift from traditional, centralized financial systems to peer-to-peer finance, powered by decentralized technologies backed by the blockchain.
From borrowing platforms to stable coins, the DeFi ecosystem is a vast network of integrated protocols and financial instruments. In fact, there is a wide range of possible uses for decentralized finance, whether one is an individual, an investor, a developer or even a centralized institution.
DeFi is often associated with blockchain technology, and thus with crypto currencies. Yet it is less related to its most publicized representative (Bitcoin) than to its main competitor. Ethereum, an open source blockchain platform, is in fact the main programming language used in the development of DeFi services.
DeFi’s solutions, which are still under development, cover a wide range of areas. They meet several users’ needs in the field of cryptography (from confidentiality to liquidity, including insurance and transfers).
Platforms are emerging, such as Argent, which allows individuals to secure their crypto-currency transactions through guardians (other trusted users or devices). Zumo, on the other hand, allows users to pool their crypto wallets and facilitate transfers between individuals around the world. As for Nexus Mutual, it draws a decentralized alternative to insurance by allowing virtual communities to get together to pool their funds and share risks.
How is decentralized finance shaping our future?
Decentralized finance is more than just a digital twist on previously known systems. Its main detractors are often from these same traditional systems, but it has a real disruptive potential from various angles.
DeFi as a tool to reduce financial inequalities
The main effect of decentralized finance is to make financial services that were previously reserved for a minority accessible. This is particularly the case with borrowing, as projects are funded for the quality of their ideas and execution plan. The factors set by intermediaries are thus becoming obsolete.
Rather than restricting the exchange of assets, such as stocks or foreign currencies, to market participants, the emergence of decentralized exchanges (DEX) means that crypto-currency holders no longer must leave the crypto space to exchange their dematerialized assets. This is the case on Uniswap, for example.
Instant and secure transactions
DeFi provides a more transparent and secure transaction framework, replacing many outdated processes. Smart contracts, for example, automate many financial services features. Decentralized finance also removes the need to trust a centralized governing entity.
In the face of new threats (hacking, data leakage) DeFi provides answers on the three strategic components of scale, pace, and security. The robustness of its protocols allows borrowing or lending money on a large scale, between participants who do not know each other and without any intermediary. Interest rates are set according to demand, ensuring a more equitable and inclusive system.
Neutral technology vs. human fallibility
Centralized financial regulators focus largely on human negligence or malfeasance. These major flaws take the form of fraud, insider trading, or modeling errors. Each of them is therefore intimately dependent on the human factor in decision making.
Unlike its human counterparts, a decentralized system (which relies on technology) acts in a neutral way. The cryptographic principles of the blockchain ensure the documentation of information only after verification of its authenticity. DeFi’s applications therefore help identify and prevent potential financial scams or unfair business practices.
Of course, decentralized finance always involves a degree of risk. Often associated with money laundering, it is not immune to a badly programmed algorithm. Moreover, many DeFi protocols are tightly integrated with their native token, whose value is sometimes more volatile than traditional assets. But the fact remains that it is still the best tool for solving problems with the financial system. All in one technological leap!
A future yet to be shaped: the challenges of decentralized finance
While DeFi has many advantages, it is important to consider its weaknesses to properly assess its potential. This approach is necessary to perfect a system that is still in its infancy. Soon, legislators will have to consider in particular:
- Its scalability. DeFi projects are undoubtedly suited to enable financial inclusion of a broader population. However, they face challenges in the scalability of the host blockchain. The issue of confirmation times and transaction fees (especially in times of congestion) will need to be addressed. This is particularly the case with the new version of Ethereum.
- Its uncertainty. In the event of instability in the blockchain hosting a DeFi project, the latter could also prove more unstable.
- Liquidity concerns. Liquidity is also a critical factor in projects based on DeFi and blockchain protocols. As of October 2020, the total value locked up in DeFi projects was over $12.5 billion. Therefore, it is undeniable that the DeFi market is not as large as traditional financial systems.
- Shared responsibility. In decentralized finance, platforms do not cover mistakes made by users. The latter will therefore have to take full responsibility for their funds and assets. It will therefore be necessary to devise tools to prevent or cover possible human errors.
The digital transformation of finance has only just begun
Of course, the future of finance is not limited to DeFi. In its Finance 2025 report, Deloitte also predicts:
- The advent of the finance factory. Blockchain automation will simplify and accelerate financial processes and transactions. This acceleration will allow individuals to play a more active role. Notably by becoming security pledges, as is already the case with some decentralized finance applications such as Argent.
- The role of traditional finance will change profoundly. To continue to exist, it will have to prove its ability to provide value. To continue to exist, it will have to prove its ability to provide value, especially by providing quality information and exceptional customer service. Some finance organizations will evolve into full-fledged service centers.
- Financial cycles will be in real time. When numbers and forecasts can be produced instantly and on demand, traditional cycles become irrelevant. Users will be able to demand more frequent information about the performance of their assets. A continuous flow of data will drive new ideas.
- Self-service will become the norm. Services ranging from budget queries to reporting will be progressively automated. Intelligent agents will increasingly be able to assess what types of business information an individual need. They will therefore be able to proactively provide it to him or her.
- The workforce and workspaces will also transform. The workforce and workspaces will also change. The finance business is changing rapidly. And the demand is particularly strong for data scientists, business analysts and storytellers. The qualities required will include customer orientation, flexibility, and collaboration. But also, technical skills, especially in blockchain and data.
The final word
Even though it has the advantage of being more transparent, inclusive, and secure, the DeFi space is still in the process of being defined. If it is to take hold, it must still overcome the obstacles of scalability and instability.
Nevertheless, if the future is uncertain, it is our responsibility to think and prepare for it. This means that both traditional and DeFi players (not forgetting private individuals) will have to take an interest in new technologies and the financial sector. And in doing so, to make the most of the changes to come…
Venice Swap Crypto Exchange is now live
Venice Swap is proud to announce that the first release of its crypto exchange is now online, with full English-language crypto-crypto trading for spot, margin, and P2P functionalities for the top 10 cryptocurrencies.
You can login in Venice Swap directly from https://trade.veniceswap.com/login
Other features will be released in the following days and weeks, from the listing of the top 20 cryptocurrencies and of new ERC20 and BSC BEP-20 tokens, to IEO features, translations in multiple languages, referral system and much more.
To celebrate this important feature, we also announce a competition trading with $60k worth of VENICE COINS in Rewards to Be Won!
Very soon we’ll also announce the launch of our DeFi Swap system.
We’d like to thank you our Development Team that is working very hard and all our community that is helping us so much!
Venice Swap Product Team