Decentralised finance (DeFi) is gaining increasing attention thanks to mainstream interest in crypto, such as Bitcoin. With billions of dollars flowing into DeFi protocols, offering alternative financial solutions, it’s giving people a way of earning money with the aid of innovative contract technology.
Although this industry is slowly growing in popularity across the globe, it has a much stronger appeal in the Southeast Asia (SEA) region mainly because of its potential to solve one of the region’s biggest challenges– equal financial opportunities for all.
A large chunk of the population in Asia is mainly unbanked, and one of the main reasons is steep barriers to entry. For example, banks require a minimum deposit fee or upfront charges to start their bank account. Other reasons include high transaction fees.
According to a report from the World Bank, ASEAN is home to an unbanked population of about 290 million, with only 18 per cent having access to credit, financial services, or investment products, leaving a large part of the population underbanked.
DeFi’s core technology can eliminate intermediaries, thus making transaction costs much cheaper and faster than any other digital banking service, making it a much more appealing alternative.
But then why hasn’t mass adoption of DeFi in the region still take place?
One of the key reasons is that many people still do not understand the concept of DeFi because of its rather complex nature. Even Mark Cuban, a billionaire investor well known from Shark Tank, who has been experimenting with DeFi, shared with the Defiant that it takes a lot of time to understand how to use DeFi protocols.
As a storyteller and communicator working closely with DeFi companies, I can impart a few insights into the promise of this industry to give context to it and offer tips on how to keep up.
A new financial system without centralised banks
As institutional investment into bitcoin and cryptocurrencies flow into the market signalled by Tesla, Square, PayPal, Mastercard, among others, it’s time for the world to start paying attention to the financial mechanisms DeFi has enabled.
DeFi platforms or protocols such as Compound (lending and borrowing), CREAM Finance (lending), and Uniswap (decentralised exchange) are enabling users to invest, borrow, lend, trade, and transact peer to peer using cryptocurrencies or digital assets.
They achieve this without needing to go through a bank or a centralised platform. This can all happen thanks to innovative contract technology created by Ethereum.
Digital lending and borrowing are not new; blockchain technology allows faster and cheaper transactions by cutting down intermediaries.
Beyond value transfers, the main growth driver of the DeFi sector is “yield farming”. Yield farming is the practice of lending crypto assets to generate high returns in the form of cryptocurrencies.
This is similar to locking money in a fixed deposit account to generate interest after a set amount of time, whereas the “financial” work is done automatically via protocols.
Though it’s highly risky, the DeFi rewards are much higher than the 3 per cent interest one might earn from a bank, and the dividends get paid out daily.
One thing that might take new users to get used to is that most of these protocols are “web3.0 native” and fully decentralised, meaning that they are run by decentralised autonomous organisations (DAOs) that have inbuilt governance systems.
Ultimately, it comes down to whether you trust a centralised organisation run by a central authority or a decentralised organisation where no single party can control the network.
We are now also seeing the first signs of these yield-bearing technologies being embedded into everyday applications such as offline map provider MAPS.ME.
As startups in this space grow, they are also receiving more attention from crypto investors and mainstream institutions, like Thailand’s oldest and largest bank Siam Commercial Bank (SCB).
Early this year, SCB launched a US$50 million fund via its investment arm SCB 10X to invest in early and growth-stage blockchain, digital assets, and DeFi startups. Calling it a “disruption”, the firm said that “it is preparing for the potential day that DeFi upends traditional banking”.
Expanding the fintech horizon
The fintech industry now needs to expand its horizon to consider DeFi, and CeFi (centralised finance) systems, as both ecosystems will play an essential role in shaping the future of finance. CeFi refers to centralised systems that bridge legacy finance platforms with the new digital asset industry. These include exchanges like Coinbase or crypto lenders such as Nexo.
The current sentiment in the market is that DeFi is multiplying and will eventually “eat” CeFi. While we will see the gap between DeFi and CeFi narrow, the natural next bridge is to the fintech industry.
Also Read: Taiwan’s blockchain ecosystem’s moment towards mass adoption
The fintech industry has come a long way with an ecosystem of challenger banks that have consumer-friendly applications and widely used products.
All it will take is one fintech to enable DeFi features on its platform to see the domino effect of fintech products and DeFi offerings collide. Fintechs should start learning about the benefits of DeFi and start integrating with projects today to stay ahead.
Keeping up with DeFi
The DeFi industry is growing fast. In January 2020, it had a US$500 million market value. As of September 2021, its market size is nearly US$166.45 billion in Total Value Locked (TVL). Keeping up is a job on its own, which is why education is key to everything.
Allow me to share some newsletters and platforms you can start with to watch this lighting speed innovation.
Firstly newsletters like Defiant and Bankless help a lot with learning about what is upcoming. To track the activity of the growth of Defi, there are wallet platforms such as DeBank that has a good analysis tracking site; there’s also Defi Llama and DeFi pulse with variable data.
CoinGecko, the go-to crypto price and analysis tracker, is another source to consider. The top leading exchanges are Uniswap and SushiSwap, which have the most volume.
A typical inside joke in the industry is that the amount of knowledge we absorb in one month in crypto is equivalent to one human year. Cryptocurrency’s promise is to make money and payments universally accessible to anyone, no matter where they are in the world.
To see cryptocurrency fulfil this promise starts with people getting educated about industries like DeFi, holding cryptocurrency, and eventually using it in our day-to-day lives.
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