How DeFi Could Disrupt the Prevailing Centralised Financial Order

Decentralised Finance (DeFi) stands at an exciting juncture today. This technological innovation-led revolution bubbling under the surface over the years has started to make its impact felt globally, capturing the attention of everyday consumers and Wall Street veterans equally. Over the next decade, DeFi is anticipated to disrupt the prevailing financial order in markets to build an inclusive finance culture.

Over the last couple of years, the DeFI ecosystem has primarily enabled financial services such as borrowing, lending, and trading for users, similar to those provided by legacy financial institutions or Centralised Finance (CeFi). What makes DeFi stand out is the fact that DeFi platforms are built on top of blockchain protocols, making them paperless and efficient. The distributed ledger system makes data immutable, irreversible, and tamper-proof through verifiable cryptography, ensuring transparency.

Besides blockchain, underlying smart contract technology enables peer-to-peer transactions without third parties such as banks, insurance companies, agents, exchanges, or brokerages. Taking an example from the insurance industry, if a user opts to avail of any service through DeFi, the journey would become entirely different. The smart contract would automate the process, eliminating pointless paperwork and complex audit systems. In the gaming industry, for instance, players can play to earn, control ownership of assets, and generate creator-led revenue streams. Other real-world use cases include tokenising real-world assets and collateralising them for a loan.

In the DeFi space, these services are available through dApps (decentralised applications), most of which are currently built on the foundation of Ethereum and others on Binance, Solana, Cardano, Polygon, etc. These services and products are battle-tested with billions in liquidity and millions of users. As per DefiLlama, the total value locked in DeFi lending protocols peaked at $50 billion (4,07,970 crore) in early 2022. Another set of data released by Emergen Research suggested that the market size might cross $500 billion (roughly Rs. 40,79,700 crore) by 2028, at a steady CAGR of 43.8 percent.

Currently, the Web3 ecosystem has over 100 million users, of whom only 15 million access DeFi opportunities. These early crypto holders and DeFi adopters who have some technical competence are enjoying and reaping the benefits. Accelerating adoption among mainstream mass-market users would need a few fundamental issues to be solved.

Still in the process of evolution, the current DeFi ecosystem obviously has scope for improvement. The key to its next big growth story lies in ease of use, and the industry might look at addressing a few areas, including discovering, evaluating, and utilising fragmented opportunities on DeFi. Another area might be a data-backed assessment of opportunities in terms of rewards, risk assessment, social ratings, and reviews, and integrating them into a single platform with a simplified user interface.

Usability can be improved by abstracting chain complexity and providing one-stop solutions to ensure simpler buy and sell processes, with easier trackability of owned assets. The onboarding process can move to a keyless non-custodial solution, whereas the current process includes storing and securing seed phrases, making it too complex for regular users.

Security needs innovative solutions and better experiences to solve private key thefts and phishing attacks. Since hacks primarily result from security breaches, with hackers often gaining access to victims' private keys, technologies such as Multi-Party Computation (MPC) can provide high security where MPC nodes run in geographically distributed data centres, making security compromise extremely hard. Here the users have complete control over their assets without fearing losing the fund.

While the above challenges are being addressed, India's sizeable number of DeFi users can benefit from the growing ecosystem. India is ranked sixth in the world for DeFi adoption, according to Chainalysis' 2021 Global DeFi Adoption Index. India has a strong community of Blockchain developers, and the industry can also explore possibilities to integrate the current and upcoming opportunities in the Indian ecosystem.

One thing is clear: DeFi has the potential to fuel our already vibrant technology industry, creating more avenues for revenue and employment generation. Our developers have the capability to build products and apps that could cater to an audience not limited to India. Developers, builders, and startups in the Fintech and Web 2 space have already warmed up to the opportunities and are ready to shift or extend their capabilities by upskilling themselves.

Overall, there is excitement and enthusiasm among people for digital assets, and if we could channel this energy, we will be able to lead the decentralised revolution. Let us not also forget the core promise of DeFi to create greater financial inclusion and bank the unbanked.

The author is the Senior Vice President, CoinDCX.

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