It is undeniable that blockchain is disrupting every sector of the global economy with its boundless applications and innovative products. Decentralized finance (DeFi) is one of the blockchain use cases that has been striving to transform the traditional banking system. The myriad of DeFi use cases emerging in the fintech space has presented solutions, like lending, borrowing, staking, exchange of derivatives, etc.
The current trend is vindicated, as DeFi strives to create an alternative to the rigid traditional financial system. Additionally, government regulation or unclear regulations and a faulty banking infrastructure have enabled DeFi projects to thrive. But, the idea of DeFi has also encountered numerous challenges, like liquidity problems and daily spending, which have limited it from accessing the mainstream financial market. Furthermore, 32% of those who participated in the Blockfolio survey have no clue what DeFi is.
In the past five months, the DeFi landscape has swollen, depicting the increasing interest in this niche of the blockchain industry. So, could this prove to be the financial revolution that people have been waiting for?
DeFi Numbers Do Not Lie
The recent statistics from DeFi pulse show that more than $7.7 billion is tied up in the DeFi market, with almost $4 billion added to the market capitalization in the past two months. Several DeFi projects and platforms have experienced significant growth. Compound, a decentralized lending company, has a current market cap of $540 million; but, it was only at about $100 million in mid-June.
Token Insight’s Q2 2020 report showed that DeFi users have more than doubled from 100,000 to 230,000 since the beginning of the year. Nevertheless, financial experts are worried that the current hype surrounding DeFi could be short-lived as it might be based on assumptions rather than the real application of DeFi products. Johnson Xu, the head of research at TokenInsight, said:
“In the short term, the high-interest rate and the incentivized liquidity mining mechanism has created a hype in the space, which directly pushes up the DeFi market, resulting in a speculative push in the DeFi space. Without any further applications and use cases to be created to accrue meaningful value within the space, we believe the recent DeFi hype could be short-lived.”
Challenges before Going Mainstream
Despite the hype surrounding DeFi, this niche of the blockchain industry is still in its infancy. There are still some things that have to be solved before DeFi can transit from its rookie stage to a mature financial market shaper. The primary concern about DeFi products is the vulnerability of smart contracts. An example is an attack on the bZx protocol in March, where an attacker leveraged the system’s flash loans feature to take advantage of a defect in the program.
Because most DeFi contracts run on the Ethereum blockchain, the network’s high gas charges hinder the use of DeFi products. Regarding this issue, Vadim Koleoshkin, the COO of Zerion — a DeFi interface — said: “DeFi allows you to access a range of financial products from anywhere in the world, but it is accessible to the people ready to pay tens of U.S. dollars for each operation.”
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