DeFi: More than the Latest Buzzword

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DeFi has become one of the most talked about buzzwords in blockchain technology, but its value goes far beyond an investment. It’s a fast-growing area encompassing many facets of crypto with the core aim of connecting the real-world with blockchain. Many argue that the mass adoption of the digital economy is on the horizon, but with the explosion of DeFi solutions in recent years and months, this could be the final movement that pushes it fully mainstream.

What is Decentralised Finance?

DeFi describes services built using blockchain technology to create a digital financial system. Its mission is to address the shortcomings of the traditional economy through decentralisation and applying the benefits of blockchain to real-world use cases. DeFi and Dapps (decentralised apps) are mostly built on the Ethereum network due to its flexible, open-source software, and its use of smart contracts that automatically execute if certain conditions are met.

This decentralisation lets everyone gain access to the financial system – one of the biggest issues facing the globe right now is that 1.7 billion people are currently unbanked. Anyone with access to the internet could, in theory, access DeFi, bringing this large community of people into the economy.

Why is DeFi Growing?

DeFi has exploded in recent years. DeFi Pulse shows that the value of DeFi has increased from $650 million this time last year, to around $40 billion today, whilst the world’s largest decentralised exchange, Uniswap, has recently recorded an increase of 26% in its weekly trade volumes.

The benefits that DeFi can offer are enormous, from reduced fees and faster transactions to financial inclusion, greater transparency and increased security. Growing recognition of this, alongside increased disillusion with traditional financial services, are making it far more attractive than before.

In fact, many believe that the biggest trigger in the growth of DeFi was the 2008 Financial Crisis, caused largely by poor decision-making from centralised authorities. Today, in an era of economic downturn since the COVID-19 pandemic, consumers are faced with similar issues leading them to look for alternative forms of finance, and decentralised financial services could be the answer.

However, it’s not quite that straightforward, where some of the biggest barriers to mass adoption are scalability, accessibility and public perception.

Inaccessible to the Masses?

Technological improvements since Bitcoin’s inception have given people more straightforward access to DeFi since late. Many argue that the development of applications and tools such as Uniswap are giving novice crypto-holders access to DeFi, but at the most basic level, users must have access to an e-wallet such as MetaMask or Coinbase Wallet, [YR8] which are difficult to use.

Aside from this, the cost of accessing DeFi is astronomical. You might have heard of the Cryptokitties craze in 2017 – an online game that was one of the first major examples of a Dapp and saw virtual pets bought and sold. The game proved so popular, that the number of transactions on the Ethereum network increased sixfold in the first week of December, causing transaction (gas) fees to soar, whilst many feared that the entire network would crash.

Today, history is beginning to repeat itself; with a growing demand for DeFi, the number of transactions on the Ethereum network have also sky-rocketed. A subsequent hike in transaction fees mean that users must start with several thousand dollars to make it worth their while utilising the services of DeFi, making it less and less accessible to the average person, and undermining many of the benefits that DeFi has to offer.

For example, a common use of DeFi is yield farming on platforms such as Synthetix and Curve Finance, allowing users to deposit collateral, which they earn interest on. Their popularity stems from the high staking rates they display, far superior to most high street banks. However, rising gas prices mean that the fees associated with depositing and taking out low-value yields make the rewards negligible.

Blockchain Improvements

Fear not, as several solutions have emerged that allow casual users to access the benefits of DeFi. Digital payments platform, Wirex, for example, have launched their X-Accounts feature this month, allowing anyone with a Wirex account to easily deposit collateral into pots of money, from which they can earn up to 16% APR interest back. Performed within the app, it significantly reduces the gatekeeping and transaction fees typically associated with staking and yield farming, and puts the power of DeFi into the hands of the everyday consumer.

We’ve also begun to see a rollout of upgrades to the Ethereum network in recent months, that are beginning to address the scalability issues seen in the Cryptokitties saga and spike in Ethereum-based transactions. On 15th April, we saw the ‘Berlin upgrade’ of the Ethereum network roll out which has already led to a reduction of gas fees to more manageable levels that make the prospect of DeFi more attractive. It’s likely that the biggest improvements are yet to come though, with the Ethereum 2.0 upgrade, a full migration to a proof-of-stake protocol, and sharding due in the next year.

Regulations Towards DeFi

Regulatory attitudes towards DeFi is another factor that will dictate its trajectory. As the digital economy threatens to overtake the traditional economy, and crypto has the potential to become more powerful than the US dollar, governments and regulatory bodies are beginning to take notice.

In fact, the EU and US proposed legislation that could ban DeFi in December last year. However, many argue that it would be very difficult to shut down a decentralised system given that the power to regulate DeFi is blurred – most DeFi transactions and Dapps operate globally, complicating the jurisdiction that they are based in.

In contrast, at the Innovate Finance Summit in April, Rishi Sunak, Chancellor of the Exchequer, announced the UK’s positive stance towards blockchain, including the creation of a taskforce to investigate the potential of a central bank digital currency. For UK crypto enthusiasts and businesses, this was a pivotal moment that will hopefully see the country embrace DeFi to “capture the extraordinary potential of technology”.

A structured framework for the growth of the digital economy that goes beyond regulatory jurisdictions will help to give the government, consumers and businesses the confidence to operate in it, whilst supporting the idea that crypto and DeFi are here to stay. However, working with, and not against crypto/blockchain companies, is vital in fostering this growth that will raise standards, reduce risks and increase checks across the board.

The digital economy is on the brink of mass adoption. The benefits of DeFi over the traditional financial system are clear, but there are certainly improvements to be made. Regulatory support, collaboration between stakeholders, and improvements in accessibility and affordability are all vital in allowing consumers to realise these benefits and discover the full potential of a blossoming world of DeFi.

About the Author, Pavel Matveev

Pavel Matveev is the CEO and co-founder of Wirex Ltd. – an industry-leading blockchain-based payments platform that seamlessly integrates both fiat and cryptocurrencies. Pavel brings 15 years of experience in software development and IT management from his previous work at Barclays Capital, Morgan Stanley, BNP Paribas and Credit Suisse.

He is a firm advocate for the mass adoption of cryptocurrencies, and founded the company as a solution to the then complex and confusing process of buying cryptocurrencies. He has published numerous articles in key international publications, and spoken at various blockchain and payments conferences around the world including Money 20/20 Europe, The Pay Expo, Shift Money and Finsum Japan on topics including cryptocurrency, fintech, business and the economy.

Pavel is responsible for the high-level functioning and growth of Wirex, with a specific focus on new product development and platform evolution. Pavel and his co-founder Dmitry Lazarichev brought Wirex to life in the UK in 2014, and has since expanded the service into Europe, North America, Canada, Singapore and Japan. The company currently serves 3 million users in 130 countries and to date, the platform has facilitated over $3 billion in transactions.

Pavel leads a team of over 200 dedicated and engaged employees, including over 100 highly skilled engineers and developers based in Kiev. He is seen as a leading figure in the arena of mass adoption for cryptocurrencies and is a highly sought-after speaker at blockchain and payments conferences around the world.

Wirex has the support of large institutional and private investors and is on a significant growth path, aiming to expand further in APAC, Australia and Africa. They place a strong focus on regulation and compliance and are one of only 3 crypto-friendly companies worldwide that have earned a UK-FCA e-money licence.