Decentralized Finance (DeFi) growth has been explosive. In the last year, the value locked into DeFi has increased 1500% to $8bn, according to DeFi Pulse. As analysts question how disruptive it will be to traditional finance, Crypto.com and Boston Consulting Group (BCG), released a joint research report weighing the implications DeFi will have on centralized finance.
- Decentralized finance, or DeFi, aims to give users an alternative by removing the need to trust centralized parties. By removing the intermediary and automating many functions, DeFi can provide lower costs, higher degrees of security and privacy, resist censorship, increase accessibility and promote a decision-making democracy.
- Centralized finance is ill-equipped to serve the under-banked sectors of the world, like SMEs and individuals in emerging economies. The World Bank believes this represents a $380bn opportunity.
- There are six critical improvements crucial for DeFi’s future growth and adoption: 1) blockchain throughput and high network fees, 2) currently limited liquidity, 3) security and smart contract risk, 4) the necessity of over-collateralization, 5) regulatory risk, and 6) consolidation of DeFi protocols around a single network.
- There are three key areas where traditional finance will be impacted: payments, lending, and exchanges. DeFi has the potential to result in significant cost savings for merchant and individual transactions over traditional financial services.
- Without decentralized governance, DeFi cannot fully solve the challenges faced by traditional finance. And if DeFi protocols are not fully decentralized, they are still prone to mismanagement and security breaches, or malicious developers.
- For traditional finance players, it is important to understand the role your company can and should play in the ecosystem during the introduction of a DeFi protocol and its associated applications. There are four archetypal roles that an organization can play: 1) orchestrator, 2) partner, 3) contributor, or 4) user.
- Companies applying disruptive technologies and building new business models must place big bets. DeFi initiatives will require internal sponsorship and an adequate level investment to secure the first-mover advantage and realize the expected benefits.