DeFi or decentralized finance is changing the future of the financial world. DeFi is a subset of blockchain technology that allows for peer-to-peer transactions without an intermediary. It also allows anyone to create financial products.
Growth Factors
DeFi is growing. In 2021, the growth of DeFi transactions on the Ethereum blockchain was 780 percent, according to an article in IT Business Edge. Further growth of DeFi depends on four factors: interoperability, sustainability of yield farming, the effectiveness of DeFi insurance, and governing.
Interoperability
For DeFi to grow, protocols and platforms must be able to work together. Open standards and application protocol interfaces improve this ability. As more pcane able to work together, DeFI will grow faster.
Yield Farming
Yield farming refers to the process of locking up a portion of your cryptocurrency (or stakinperiodd of time to earn a reward. Yield farmers typically diversify their portfolios over several projects to lessen their risk, while increasing their reward opportunities. Crypto staking is a little riskier than traditional staking and the crypto market is too new to determine whether it is sustainable.
DeFi Insurance
DeFi insurance protects against adverse events that can occur, such as hacking and price crashes. Currently, users can provide DeFi by joining a pool. Flash loans and delivery versus pay offer other possibilities for DeFi insurance. However, the DeFi insurance industry is still too new to assess its effectiveness.
Governance
A key aspect of DeFi is its lack of a centralized governing structure. Instead, the blockchain community makes governance tokens available to community members. These tokens grant users some control over the platform, and users’ decisions can potentially cause the project to fail or succeed. As DeFi grows, its governing structure will need to adapt to changing conditions.
Challenges
DeFi still must overcome some challenges as it grows. The first is global regulation that ensures community members use the DeFi blockchain only for legitimate purposes. The second is ensuring that all market participants have equal access, regardless of where they live.
Source: https://www.itbusinessedge.com/security/how-defi-is-reshaping-finance/
