Have you been asking yourself “what is DeFi?” and how is it impacting finance? Keep reading to find out what the acronym stands for.
What is DeFi?
DeFi is a term that stands for decentralized finance. Decentralized finance refers to financial software that runs on blockchain technology.
How is DeFi improving the world of finance?
DeFi is improving the world of finance by allowing people to perform a wide range of financial activities without the need for central financial institutions such as banks and even governments.
Through DeFi, people can set up smart contracts, create decentralized apps (DApps), store and manage digital assets, and more without the need to go through a bank.
DeFi software mostly utilizes the Ethereum network. Ethereum is the most popular programmable blockchain in the world and it is helping DeFi to become more and more popular.
Every single year, more and more decentralized financial programs run on the Ethereum blockchain.
As people become more familiar with blockchain technology, these programs will increase usage worldwide. Having a decentralized alternative to traditional finance is a hedge against corruption, congestion, and high fees in the banking industry.
What is DeFi going to look like in the next five years?
As of 2019, the entire DeFi market is worth about $500 million. Considering the fact that this market didn’t even exist just a decade or so ago, its growth has been astonishing.
In the next five years, more and more companies and developers will turn to decentralized finance. They will do this in order to build financial products that can use blockchain technology and act in a decentralized manner.
This means that the DeFi market could come close to reaching one billion dollars in total value, or close to if trends continue.
After the 2008 financial crisis, which was largely caused by banks investing in risky assets and involved the Federal Reserve adding trillions of dollars to its balance sheet, trust in the traditional financial system was greatly reduced
This loss of trust in financial institutions and central banks was felt in many nations around the world. As a result, it has fueled the growth of DeFi. If another financial crisis occurs, it could increase the speed with which DeFi becomes mainstream.