Why DeFi is The Future
DeFi apps are positioned to unlock large amounts liquidity across the globe, ensure fair access to wealth and catalyze massive innovation in the financial space.
Benefits and Outcomes of DeFi in the Future
Lowers barriers to entry, slashed switching costs: the permission-less nature of blockchain-based applications — with the ability to freely and seamlessly “fork” (or copy and adapt) codebases — collapses barriers to entry for entrepreneurs down to zero.
Transparent accounting and risk assessment: Contrast this with the opaque nature of the current financial system, DeFi allows users of the platform to inspect each transaction and the quality of the collateral portfolio across the system over time.
Elimination of counter-party risk: because DeFi products are self-custodial, users never relinquish custody of their assets to a centralized operator. Several entrants such as Coinbase still maintain central control of a user’s assets in exchange for uptime and security guarantees. However by connecting a Metamask wallet to Uniswap, a user can have full ownership and trading control over their assets and avoid risk of Coinbase collapsing. Analysts estimate that over $7B worth of cryptocurrencies has been lost through centralized exchanges since 2011, whether due to hacks or operators purposefully absconding with user funds. DeFi is a paradigm change, shifting “don’t be evil” to “can’t be evil.”
Modern infrastructure, increased efficiency of markets: Unlike the current US capital market, crypto trading never sleeps. Ideally, capital should be as seamless as information in the internet age. In particular, settlement should be instantaneous, transaction costs should be minimal, and services should be accessible 24/7/365: 24 hours a day, 7 days a week, 365 days a year. It is simply not productive for a modern global financial system to only operate between the hours of 9 to 5, barring weekends and holidays.
Aligns incentives, solves principal-agent problem: The use of trustless, programmable escrow accounts in the form of smart contracts, allows DeFi protocols to bake in recourse, at the protocol level. Token holders serve as the primary backstop for faulty transactions on the network and can catch mistakes as they happen in realtime. Compare this to traditional finance, where shareholders directly lose out when management makes mistakes.
Global access, unified markets: DEXs can offer better exchange rates for certain assets than siloed centralized exchanges or service providers. In the past, developing nations have often been excluded from financial services due to the high cost of setting up local operations. Decentralized financial services eliminate most of these costs allowing internet-native services with zero-marginal-user costs to provide insurance, payment and credit services to marginalized communities.
Real-time data: A by-product of building financial services on a transparent, shared database is that all associated transaction data is publicly available in real time. For example, earnings generated by liquidity providers in the Uniswap Protocol can be tracked on per-second granularity. Investors can use this data to decide how to allocate capital, providing for more efficient price discovery and allocation of resources, while regulators can monitor real-time transaction data to identify nefarious user activity.