The Importance of DeFi
Decentralized finance offers an open and free alternative for consumers. By simply having access to an internet connection and a mobile wallet, anybody can interact with any on-chain financial service that they wish to use.
When markets are booming, DeFi is treated as the best thing since sliced bread. Something that will take over the world at lightspeed and will have been seen as an obvious solution to the flaws of traditional finance. If only it was that easy!
Now that the markets have taken a tumble, many people have begun asking what value DeFi actually provides.
In an environment where centralized entities provide better UX and where DeFi applications are more expensive for users (both in Network fees and being less efficient), is there value in continuing down the DeFi road?
Well, look no further and enjoy the read on what we believe the biggest benefits of DeFi are!
A Market That Is Accessible To All!
While the majority of people in the cryptocurrency space may not have been inconvenienced by traditional providers, large groups of people are excluded (or provided limited services) from traditional finance.
It may seem like a stretch to believe so, but consider those that:
- Live in countries that have sanctions levied against them or are citizens of these countries. Sanctions tend to be broad-sweeping and impact all individuals and businesses. This ranges from suspending international transfers to limits on maximum deposits in overseas banks.
- This results in sanctions often impacting large groups of innocent individuals and businesses, restricting them from financial services that may be necessary for their livelihood.
- Operate businesses primarily in the cryptocurrency industry or even purchase cryptocurrencies from their bank accounts. There are numerous stories of businesses that had their account closed because they interacted with cryptocurrency providers such as centralized exchanges and other on-ramps.
- This is not unique to any specific country. In October 2022, it was reported that 47% of the UK’s major banks do not support cryptocurrencies and place restrictions on transferring funds or making credit/debit card purchases to centralized exchanges. Similar sentiment has been seen across the world and restricts consumers from being able to access financial services that they wish to interact with.
Decentralized finance offers an open and free alternative for consumers. By simply having access to an internet connection and a mobile wallet, anybody can interact with any on-chain financial service that they wish to use.
A Market That Is Fair!
In traditional markets, the power imbalance between different centralized institutions and other stakeholders can result in some stakeholders being “protected” at the expense of others.
This has been seen numerous times in recent years where institutions have closed markets and even cancel trades in response to the existing trading environment.
In March 2022, the London Metal Exchange (“LME”) suspended nickel trading and canceled trades in a period that saw prices double to more than $100,000 per tonne. The LME reported that this was a necessary action due to the market becoming “disorderly”. Sources familiar with the events suggested that some of the LME’s members would have defaulted should the trades not have been canceled.
Similar events took place in January 2021 when the New York Stock Exchange (“NYSE”) and many brokers suspended trading of GameStop’s stock during periods of volatility as a result of a “short squeeze”. The short squeezes placed many funds at material risk. The suspensions saw many politicians and financial commentators question the actions brokerages took to protect Wall Street insiders from outsized losses.
DeFi protocols are simply a collection of smart contracts on an immutable blockchain. When your transaction is confirmed and finalized, users can have confidence that they are not at risk of having their trades reversed or even being able to trade them further.
Not Your Wallet, Not Your Crypto Money!
The vast majority of people using financial services trust a third party with their money. This extends from money in a bank account, to assets held by a custodian.
Leaving your money with a centralized provider can leave your funds at risk. While it is less likely with large banks that are heavily regulated, it has been displayed clearly with the insolvency of Celsius. In January 2023, a federal judge ruled that customers of Celsius Earn had transferred control of their assets to Celsius, meaning they are part of the company’s bankruptcy estate.
For those that are unaware of how insolvencies work, the assets of Celsius will be realized to raise funds to return to creditors. These funds will be returned to creditors in order of their hierarchy. Without getting into the nitty gritty of insolvency law, those customers who had money in Celsius Earn are now “unsecured creditors”. These creditors are paid last which means they often receive a pro-rata distribution (cents on the dollar) if anything.
Moreover, there have been many times in modern history when the business practices of banks have had a negative outcome for savers. In times of severe economic downturns, banks (who lend your deposits out to borrowers) have faced liquidity crises and been unable to serve withdrawal requests promptly.
If your funds are yours but your ability to interact with them is restricted — are they really yours?
DeFi protocols are non-custodial meaning you retain ownership of your assets at all times. This means that users are not exposed to the business practices of a third party!
Closing Remarks
While DeFi is still a work in progress, its benefits are clear and evident for people to see.
So while we can make more efficient protocols and give users a better experience — DeFi is here to stay!
We at @NolusProtocol plan to be part of the solution and hope you join us for the ride!
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