DeFi is the term to describe Decentralized Finance. It is a growing industry made up of money market protocols designed to allow lenders fair interest payments and let borrowers borrow against their crypto assets, which the banks do not yet offer. The top DeFi platforms are AAVE, Compound, and Maker. How it works is, lenders deposit their crypto assets into the protocols lending pool. Borrowers draw from this lending pool, and because there is no third party or bank in between, and it is just a protocol or code, both lenders and borrowers get the fairest deal on their decisions.
Bank savings rates of less than .1% don’t stand a chance of competing against the competitive 7-8% that DeFi platforms are offering on stable coins. Because these protocols run on decentralized blockchains, all you have to do is upload your digital assets to the protocol to start earning interest. This allows many unbanked citizens of the earth fair access to lending rates, as many without bank accounts do not have this luxury.
Another luxury that DeFi allows is for borrowers to get cash against their crypto assets without selling their crypto. This means you can now get cash against your assets without having to pay capital gains tax in areas like The United States of America.
How can DeFi be Leveraged for the Community?
DeFi mass adoption can happen through marketing campaigns by individual DeFi protocols, where they highlight the fact that anyone with a digital wallet can access these fair rates. Across the world, there are billions of people who are not “credit worthy” in the eyes of banks, so they do not enjoy the banking experience we do in the West.
This shows truly how massive the outreach of these marketing campaigns can be if successful. Established protocols can quickly shut down the argument on whether or not the code should be trusted, as platforms like AAVE are open-source and offer a bounty to hackers if they can find a crack in the code.
In other words, if this hasn’t been cracked, it likely never will as the economic incentives exist, and the world’s top hackers would have found a way around the code by now. Additionally, because these protocols are open-source, customers can have full transparency into the code and know that the entire world has access to it, creating additional trust in the protocol.
Why Do We Need Cross-Chain DeFi Protocols for the Future?
Cross-Chain interoperability between networks will be massive for the space, as bridges between networks allow for smoother interactions with DeFi platforms. For example, Bitcoin holders can utilize cross-chain interoperable systems to get Ethereum smart contract capabilities. If DeFi protocols are cross-chain, it allows for scalability problems to evaporate, as users can leverage the best traits of all blockchains to browse and make decisions on platforms effortlessly.
We need these cross-chain DeFi protocols because it’ll allow for maximum freedom among users, for they can go about hopping between platforms with their assets in a frictionless way. Utilizing multiple blockchains increases security and scalability, helping ensure users that their investments are safe on these protocols and that these platforms will continue to scale to offer the best lending and borrowing solutions.
As DeFi platforms grow and cross-chain interoperability platforms like Polkadot continue to evolve, consumers will get the best access to DeFi platforms. Network effects are certain to continue to grow as new users become attracted to the idea of earning 8% on their USDC, and crypto enthusiasts feel the urge to earn interest in their assets. Going into 2022, keep an eye out for regulations of the DeFi space, allowing banks and institutions to offer DeFi like protocols to their customers, paving the way for mass adoption at scale.
If you are an investor, there is no doubt that DeFi governance coins are an amazing play on the future of DeFi, as they will continue to evolve. The potential for upside runs parallel to the revenue numbers of traditional banks. Keep in mind regulations could also serve as a temporary pullback, but this would undoubtedly be an amazing buying opportunity.
Remember that if everyday people are allowed to play at the line of scrimmage in terms of DeFi rules, institutions will need to play 10 yards behind the line of scrimmage to ensure they are following the laws of the land that governs them. As the framework for DeFi becomes clearer, institutions will feel more comfortable parking large amounts of capital locked-in protocols.