DeFi, or decentralized finance, has become a popular alternative to traditional banking and investing. While some of this industry’s growth is attributable to its sheer newness, many investors, asset holders, and consumers are also attracted by its accessibility and the ease with which they can use DeFi to purchase financial products.
At its core, DeFi is a form of finance that doesn’t rely on central financial institutions like brokerages and exchanges as intermediaries. Instead, it relies on smart contracts and blockchain technology to authenticate and facilitate transactions. Perhaps the most well-known form of DeFi is cryptocurrency.
As of April 2021, analysts believe there is now more than US$100 billion worth of assets locked into DeFi.¹ There has been some fluctuation in the Defi market due to its novelty, but long-term trends suggest that DeFi will be a revolutionary alternative to traditional finance.
Here’s why DeFi will continue to be a billion-dollar industry.
DeFi Is Attracting Scores of Millennials and Younger Consumers
Many young consumers struggle to grow financially because they can’t qualify for loans or purchase financial assets through traditional intermediaries. As a result, they enter adulthood with no credit or bad credit, which all but disqualifies them from reaching important milestones like purchasing a home or investing for retirement.
For example, a recent Federal Reserve study found that the Millennial generation (those born between approximately 1981 and 1996) have “lower real incomes than members of earlier generations when they were at similar ages, and Millennials also appear to have accumulated fewer assets.”² After enduring two recessions and struggling with stagnating wage growth, Millennials have been searching for alternative ways to invest, purchase financial products, save for the future, and earn passive income.
DeFi offers them an opportunity to do so where traditional financial institutions cannot. Instead of satisfying arbitrary rules to qualify for financial assets, young consumers can simply say they want a loan through a DeFi network and receive funds via a pool of individual investors.
The entire process is governed by smart contracts, and there are no middlemen involved to draw profit from the transaction. Only the investors in the loan draw a profit from interest on the loan.
Young consumers searching for passive income options can take the other route in these types of transactions. They can invest funds into a DeFi loan and earn interest with almost no barriers to entry. This opens more opportunities for microtransactions and microfinancing, which could significantly improve the prospects of consumers who don’t have large incomes or savings deposits.
DeFi Allows for Greater Financial Accessibility and More Financial Freedom
DeFi also makes loans and capital more accessible to low-income and underbanked communities. In traditional banking, borrowers must provide extensive documentation to show their creditworthiness before they can even be considered for a loan. In many DeFi programs, the consumer simply deposits collateral in the form of cryptocurrency while other members of the network deposit money into the lending pool.
The entire process is governed by blockchain-based smart contracts, which act as a failsafe against both the devaluation of the collateral and a default on the loan. Communities that have few banking options or are unable to meet minimum thresholds to open an account can turn to DeFi to store their assets, earn interest, or obtain a loan.
The significance of this type of financial accessibility can’t be undervalued either. Nonprofits, think tanks, and government committees have spent years searching for ways to give underbanked communities more opportunities to get ahead. DeFi has the potential to provide financial access directly to anyone who can access the internet, so it holds immense promise for growth.
DeFi is Getting a Legitimacy Boost from Mainstream Players
Finally, decentralized finance is beginning to get mainstream attention. After a wave of cryptocurrency startups swept the globe, more and more traditional financial organizations are adopting cryptocurrency and other DeFi products as part of their financial offerings. Many of those that haven’t adopted DeFi are investigating it as an opportunity.
The U.S. Securities and Exchange Commission (SEC) is set to release additional guidance and clarity on cryptocurrency and DeFi. Although the absence of regulation is one of the most attractive aspects of DeFi, there is a desire in the industry for regulatory certainty, and any announcement on decentralized finance from a regulatory body signals its legitimacy as an alternative to traditional finance.
Pursue Your DeFi Goals with EQIFI
DeFi is no longer a novelty. Not only does it have staying power, but it has the potential to revolutionize the financial industry and provide new opportunities to a vast population of consumers.If you’re interested in harnessing the power of DeFi, look no further than EQIFI, a decentralized protocol for pooled lending, borrowing, and investing.
Contact EQIFI today to learn more.
- Dale, Brady. (April 29, 2021). “DeFi Is Now a $100B Sector,” CoinDesk – https://www.coindesk.com/market-wrap-basel-btc-jump-eth-slips.
- Kurz, Christopher, Geng Li, and Daniel J. Vine (2018). “Are Millennials Different?,” Finance and Economics Discussion Series 2018-080. Washington: Board of Governors of the Federal Reserve System – https://doi.org/10.17016/FEDS.2018.080.