DeFi: Showing Signs How It Is The Future Of Finance

about 3 years ago

The hottest topic in cryptocurrency last year shows no signs of slowing down in 2021. We are seeing a lot of attention coming into this relatively new financial system that is forming.

Decentralized Finance (DeFi) was long promised to be the salvation to our economic struggles. It truly brought one of cryptocurrency's tenets to the forefront: operating without a third party. If code is law, this certainly is it.

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Naturally, skeptics can point to the exit scams as an issue. Unfortunately, this is a part of all new technological advancement. There are simply people who have nefarious intentions and refuse to put forth the effort to achieve success in an ethical manner.

Nevertheless, that type of activity once concerned the politicos with regards to the Internet. The early days were filled with scams and fraud. In fact, one could state that things haven't changed much. There is still a lot of it occurring on a daily basis.

That does not stop us from using the Internet. We continue to go online and interact in a variety of ways. Ultimately, we gain some intelligence which helps us to take preventative measures. Technology also helps with more advanced anti-abuse software.

Thus far, we are getting signs into the future of finance. The path from where we are to a decentralized world of financial products and service is in our sights.

This week we saw the release by the Hive-based project, @leofinance, of a new DeFi platform on BSC. This already crossed the $10 million market in total value locked, an impressive amount for something so new.

With exit scams rather common, this is a new approach. Here is a project with close to two years of history on developing different applications. It is not some anonymous coder. This is part of the shift away from the Wild West.

At some point, we can expect a known company to follow this path. Some financial entity will get the idea that it can do the same thing. At that point, we will start to see a greater embracing by the traditional firms. They are simply going to have to adapt or be eliminated.

Yesterday, we saw a proposal put forth by @klye who is looking into pulling what is done on Ethereum and BSC to Hive. This, if accomplished, will offer the potential for cross-chain integration. Essentially, it could be thought of "anything they can do, Hive can do". The best part is that it will utilize HIVE for all transaction fees.

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These two examples show how important this sector is. We are witnessing the transformation before our eyes.

Ethereum developers have done a terrific job laying the foundation of what will be an entirely new system. How far can this go? That is anyone's guess.

However, one of the keys will be that individuals will be able to post digital assets as collateral for loans. This is a common practice in the world of finance. Yet, it is one that is wrought with paperwork and applications. All this takes time.

The easiest concept to use is the idea of getting some type of check in 90 days. This will be a payout that can be used to payback a loan. If one is going on vacation, the choice is to try and get a loan from a bank or use credit cards with high rates. The money will be there in 90 days so there is no worry there.

With DeFi, it is simple. Put up some collateral to get the loan. When the check comes in, convert to crypto and pay it back. The money is paid within seconds since there is no paperwork or bank to deal with.

This brings up the point of assets. Part of the problem, in addition to the banks being a pain in the hind end, is the fact that most people do not have anything they can put up. Their main asset, a home, is usually already leveraged. So what is one to do?

Obviously, we are seeing an enormous amount of wealth generation already in the crypto world. While we can look at what Bitcoin is doing, it is best to look further down the scale.

Individuals, often of no great means, are accumulating digital assets through their activities. This is providing them with the financial foundation required to take advantage of the financial products offered.

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DeFi is a system that provides financial products and services to people outside the present financial system. However, it looks like it can add another layer to what individuals are doing that the existing one does not: the ability to create income/wealth to get involved.

For example, how could this system be tied to NFTs? Right now that sector is a bit crazier than even the DeFi world, which is to be expected at the early stages. Nevertheless, when things settle down, consider the possibility of people creating NFTs that are tied to their works and the using the value of the as collateral for things such as loans. This could be a very real possibility as the DeFi infrastructure got built out.

We are well aware there is money in the NFT industry. While a lot of stuff might end up having little to no value, there will be things that carry a high price tag. Just this week we saw a NFT go for near $70 million.

Ultimately, we are looking at the world of DeFi expanding. Will the astronomical rates of return always be there? Not likely. However, it is a realistic scenario to see the industry grow to the point where it offers outstanding returns in a low risk manner.

If we see the rates settle at, say 10%-15% annual return, this will really do damage to the banks. How can they compete when they are offer a couple percent, if people are lucky? The answer is they cannot.

The Network Effect is something to consider in this sector. As more people join the fray, we are going to see a great deal of incentive to develop more offerings. This will keep pushing DeFi further into the centralized finance space and take over.

Another think to keep in mind is the idea of reference points. With new technology, the first stage is based upon what we know. Thus, DeFi is mimicking the financial system we have now. However, things change when the 2nd and 3rd generation rolls out. It is there where we see a lot of novelty, something that is completely different from what we knew before.

It is likely we will see the same thing with DeFi. In a few years, the development will be in areas that we are not even aware exist today. That is how innovation works.

This is not very promising for the traditional banks.

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