Decentralised Finance, or DeFi, is one of the latest trends in
fintech. Since the launch of Bitcoin in 2009 along with the use of
blockchain technology, new currencies have given rise to new
markets. These new markets are built upon unclear regulation,
anonymity, and not tied to any institution or jurisdiction. DeFi is
the antithesis of the traditional regulatory system, that is, the
banks and the government.
DeFi and Centralised Finance
The modern era has given rise to a lingering distrust in
traditional institutions, and the libertarian movement has
encouraged individuals in operating outside of these
influences.
Younger generations have found themselves unable to participate
and contribute in a significant way to traditional markets, which
with regulation have become incredibly stable and less appealing
for bull investors. The new blockchain technology has given rise to
a new movement in finance. It’s attractive for those open to
accepting the financial risks and those who are jaded with
financial institutions.
Traditional company stocks and government currency are highly
regulated and for good reason. With regulation comes gatekeepers
that make operating in the economy substantially more difficult
than it needs to be, and this usually involves someone ‘getting
their cut’.
Have you ever tried an international payment transfer and become
frustrated at the associated fee? Do you believe that payment
providers taking a percentage of the transaction is frustrating?
Are you annoyed with the amount of profit banks are able to make,
just for holding on to finances or transferring them between legal
entities?
Freedom and Risk
With DeFi free from stringent regulations this provides the
freedom of anonymity for its participants. Without institutional
interference, no one in the middle is making any money from your
investment. Without institutions being involved in these
transactions, those participating with DeFi are also potentially
removing themselves from tax obligations. DeFi opens up a whole new
world of economic activity.
DeFi offers investors better accessibility, anonymity, and
complete transparency with the full transaction record of each
token publicly available. The downside with many new markets is the
inherent volatility. Any investment is valued based on the
market’s perceived value of the asset.
If an investor invests in stocks, it’s the underlying
business, products and brand reputation that is being invested
in.
If an investor invests in currency, the value is the
nation’s underlying gross domestic product and global
value.
If an investor invests in property, the value is the perceived
value of that land compared to other land.
The value derived by DeFi is the participation of the actors in
this new economy and how they value digital currency. Participants
in this new economy do so at the risk of other players
destabilising their wealth.
A Solid Gold DeFi
One trend for 2023 is gold-backed financial instruments and the
stability this offers investors. A gold-backed cryptocurrency is
available separately from traditional gold investment via
institutions or physical assets. As a digital asset, gold on the
DeFi exchange exists anonymously inside a virtual wallet. As a
financial instrument, this provides much better access to more
stable investment options.
DeFi and Crypto Gaming
With access to 3 billion gamers worldwide, DeFi and crypto
gaming has been an evolving trend. Gamers are able to mine
cryptocurrency as part of a game, earning virtual wealth outside of
the traditional financial system while also justifying hours of
gameplay. With the Metaverse on the horizon and gaming fan
communities within social media, this new Metaverse will also need
some form of digital currency and trading platform for users to
participate in a virtual economy. DeFi will most likely help
facilitate the brave new metaverse.
NFT and DeFi
Non-Fungible Token (NFT) platforms are also poised for some
disruption with DeFi during 2023. With the recent fraudulent
activity that has plagued NFT, DeFi’s capacity to provide
transaction transparency is potentially a path to provide more
legitimacy to the art and digital artefacts industry.
Possibility of Regulation
Also on the horizon is the possibility of regulation, which in
some ways could eliminate many of the advantages of NFTs. The
G7-supported Financial Action Task Force (FAFT) primarily exists to
combat money laundering, which DeFi is also a target for. In order
to navigate these murky ethical waters, platforms will need to rush
to enhance their ability to provide anonymity and avoid being tied
to any jurisdiction.
Decentralised Finance is definitely a trend to be aware of, and
it will be interesting to see where these developments in
cryptocurrency bring investors and innovators in this
rapidly-evolving digital economy. The trend will either change the
world, or the world will change without it.
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