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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