Blockchain technology is on track to make significant changes to a number of global economic sectors, and as the space matures, decentralized finance (DeFi) is clearly in the crosshairs of the upcoming revolution. Over the course of the past two years, as overall crypto values have declined, the amount of cryptocurrency connected to DeFi has grown rapidly. This unique use of distributed ledger technology is on pace to become massive in coming years, thus radically altering the global financial landscape.
Broadly speaking, decentralized finance is any financial application built on top of a public blockchain. This use includes, but is not limited to banking, peer-to-peer lending, and decentralized exchange. Virtually all DeFi involves the use of smart contracts, thus making it trustless and free of intermediaries. Thus, it can be considerably more efficient and secure than legacy financial systems.
Ethereum is by far the most common platform for DeFi, which now makes up six percent of network activity, a five hundred and thirty percent increase since early 2019. Growth in 2020 should be even greater. Ethereum-based DeFi apps such as MakerDAO and Kyber Network now hold millions of Ether in smart contracts. Other blockchain platforms such as Stellar, VeChain, and Cardano are also seeing development in this area.
The increasing popularity of DeFi is a clear example of the complex, and revolutionary nature of distributed ledger technology. Blockchain developers are rapidly creating the means to decentralize virtually every traditional financial service. It is thus very reasonable to assume that by the end of this new decade the global economic landscape will have experienced a massive paradigm shift, with a sizeable portion of the world’s wealth no longer managed by central entities.
This level of impending change creates as many questions as it answers, one of the most significant being which blockchain platforms will become the standard for this activity. Ethereum’s hegemony in the DeFi space is presently without dispute, yet there are many challengers and the competition for adoption has just begun. For Ethereum to stay on top it will need to successfully complete its roadmap and implement Ethereum 2.0 as soon as possible. In fact, given the scale decentralized finance is likely to reach, it is all but certain that multiple blockchain platforms will be involved, and those that operate best are all but certain to be the most popular. Thus, Ethereum’s role long-term remains unknown.
The extent to which governments and regulators will embrace decentralized finance is another unknown factor moving forward. There are many angles to this complex issue, as the borderless nature of blockchain technology will render many present laws and regulations obsolete. Likewise, tremendous wealth is likely to be shifted from legacy institutions. These organizations include banks, insurance agencies, hedge funds, and investment companies of all types. In fact, the profits of the legacy financial sector come largely from the inefficiencies blockchain technology promises to eliminate. The extent to which all of these players will adapt, or cooperate, remains a mystery.
One certainty is that this unique aspect of the blockchain revolution promises to become a tremendous global force in a very short period of time. Its growth is not dependent on one specific blockchain platform, nor can it be prevented through legislation or hostile regulations. Rather, DeFi is likely to soon become a household name as more people purchase and begin to use cryptocurrencies.
