Traditional investors Can’t ignore the DeFi trend, and Here’s Why
The emergence of cryptocurrencies has created a furor in the financial world. Traditional investors, who initially avoided the crypto markets, now consider cryptocurrencies as the best investment.
Complete financial paradigm shift
Since John Maynard Keynes laid the foundation for modern financial markets, investors have mostly taken positions in stocks, bonds, and cash. In modern economic history, there are examples of traditional investors who have succeeded by investing in conventional asset classes.
But the main problem with these investments and paper-based financial models is their inherent centralization, which has led to high inequality in the distribution of wealth and profits.
The emergence of DeFi (decentralized finance) has solved the problem of inequality in the democratization of the financial market with the help of financial instruments based on smart contracts. Now you can lend, borrow, invest, and trade on an open market based on algorithms that works without intermediaries.
The DeFi market has lowered accessibility barriers for various financial instruments and has shown exponential growth over the past year.
2020: Growth of the DeFi market
The DeFi trend essentially started with the Ethereum — based protocols-Synthetix and MakerDAO. What these decentralized derivatives and credit projects started has now evolved into an ecosystem with a valuation of almost $50 billion.
However, in the beginning, everything was not so beautiful. The phase from 2017 to Q1 2020 was quite slow in terms of growth. The DeFi market has only really taken off since June last year and hasn’t looked back. You might wonder what triggered such a massive growth of a seemingly nascent space.
Well, COVID-19 happened, and with it came a financial disaster like 2008 (to be precise, a larger one) that destroyed traditional markets, businesses, and the economies of entire countries.
At a time when people have seen the value of their income and savings in bank accounts continuously devalued, the growing DeFi space has provided limitless opportunities for using various open-source programmable financial protocols to make a lot of money.
Whether you use decentralized exchanges (DEX) to place tokens in various profit contracts or liquidity mining, flash loans, or cryptocurrency lending for interest, DeFi is an instant global portal for investors to erase losses incurred as a result of participating in traditional markets.
Still don’t understand why? The entry barrier is too low, and you don’t need to have a ton of cash to start with. Thanks to carefully programmed smart contracts in protocols such as Compound Finance, Balancer, Aave, etc., all transactions take place in real time without outside interference.
Cryptocurrencies represent the first real opportunity for global currencies. When cryptocurrencies become widespread around the world, people will be able to trade the cryptocurrencies of their choice with other users around the world in a matter of seconds in an anonymous, secure, verifiable and reliable process. No fees of intermediaries and no discrimination based on ethnicity, age, gender, etc.
With that in mind, it’s not hard to see how cryptocurrencies and DeFi products can pave the way for a big shift in labor markets. The currency adopted worldwide makes it easier to find suppliers from all over the world. If the work can be outsourced to someone around the world only on the basis of an agreed price and quality of work, it creates a level playing field.
DeFi Market Forecast for 2021
Even with the price of Bitcoin surpassing every conceivable record high, 2020 may have been the year of DeFi. The massive adoption of decentralized applications (dApps) to access various cryptocurrency-based financial markets indicates that the future potential of DeFi is extremely promising, and this is just the beginning.
2021 will be the year when the trend of decentralized finance will evolve into something much more significant and transform the world of finance as we know it today.
- Scale-out solutions and network bridges will fine-tune DeFi for mass adoption
The network is currently undergoing an upgrade to Ethereum 2.0. After the full transition from the Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake, the throughput and security of Ethereum will increase dramatically, and mass, full-fledged implementation will occur in the shortest possible time.
In the meantime, Tier 2 solutions will help shift the DApp load from the main Ethereum chain to numerous auxiliary chains that will be fast and inexpensive to operate. This will happen via convolutions.
Cumulative bundles are a kind of layer 2 solution that allows you to aggregate transactions off-network. These combined transactions can then be sent to the leading Ethereum network in batches, allowing it to scale 200 times more transactions than before, significantly benefiting DeFi market participants.
In addition to Rollups, it will also be possible to scale Ethereum using several technically stable blockchain bridges. Through the bridges, DeFi users will be able to access liquidity across multiple blockchain networks along with their features.
- NFT boom will give new impetus
The idea of tokenizing unique works of art, videos, or photos, or for that matter, any item from the real world, quickly found its way into mainstream media, creative, and sports circles.
NFTs will only gain popularity as they make it easier to prove the authenticity and ownership of digital art, game items, and other digital collectibles. NFT trading platforms will thrive on the left, right, and generally everywhere, as they will allow people to buy and sell all kinds of unique digital tokens using ETH (Ethereum’s own cryptocurrency), BNBand stablecoins, and other crypto assets.
According to CoinMarketRate, the NFT market has already exceeded $500 million, and the day is not far off when this figure will reach $1 billion. Just so you know: the DeFi market has already crossed paths with NFT — with NFTfi and Rocket. NFT can now be used as collateral for peer-to-peer loans. This will allow NFT holders to treat their digital collectibles like any other monetized asset. In fact, this is not possible in the world of traditional finance.
They say that ignorance is bliss. After reading all of the above, blissful ignorance of the possibilities that the DeFi market offers can surely be classified as a curse. This is not just a new market. DeFi has launched a fundamental process of restructuring the finances themselves. Ignoring a good revolution is a bad idea. Even if the risk is high, the reward is much higher.
There are many great tools and platforms that are designed specifically for traditional players to participate in DeFi. There are a great many options.
Yes, cryptocurrencies and DeFi are not without vulnerabilities and shortcomings. Some of the current shortcomings include scaling restrictions, high transaction fees, protocol branching, barriers to configuring validation nodes and mining processors, security holes, etc. However, our existing financial system has many more inherent limitations, and every day more and more people are beginning to realize that cryptocurrencies and DeFi products have more value in terms of cost, security, reliability, and speed. And the gap only widens.
Only a few revolutionary events have brought radical and irreversible changes to our lives. The birth of the Internet, mobile phones, financial technology, e-commerce, and social media were among them. The people who got involved early ended up on the winning side and the pinnacle of fame.
The creation of the DeFi market is one of those tipping points that requires mass participation in order to free up the funding itself for those who have been left out of the so-called systems built by centralized institutions. DeFi for them is your best choice.