DeFi, decentralized finance, today still plays a very marginal role in fintech and finance in general, having been born only a few years ago within the global panorama, but it is already causing banks to be afraid.
It develops from the roots of blockchain, a young and disruptive technology that has managed to win the headlines thanks to the growth of bitcoin in the last 5 years.
Today, DeFi is used in the decentralized credit/lending system, in asset management, and for managing the trading of currencies on decentralized exchanges.
As the word itself says, this tool is decentralized, i.e. it is able to do everything mentioned above on computer systems without there being an entity, company or central bank that can change the rules decided in advance.
This leads to an extraordinary result, which is to eliminate third parties that until now have stood between the saver/investor and the real economy.
The benefits are out in the open: the costs of intermediation are zero, security has reached almost 100% and trust has reached the highest levels because it is not placed in the hands of people but in the hands of a machine, which is merely an executor of the rules of the preset code.
We are certainly still at the beginning and there is a lot to do to make this sector more and more friendly for the common citizen who knows nothing about computers.
There are several aspects that DeFi will have to improve on, like making digital tools ever simpler in their use. These are products and services that at the moment are still not even minimally understood by the vast majority of the population and must therefore be made more accessible.
In short, what is missing at the moment is to have a greater awareness of what DeFi is and what advantages it can offer. It is necessary to understand how to buy cryptocurrencies, tokens and participate in decentralized services in order to make the most of the economic benefits that can be achieved.
All DeFi projects must shrug off the role of an ultra-niche financial instrument consisting of speculators, traders, financial companies and investors, but must approach both the young and the old to enable them to borrow and save money, as well as make transactions quickly and easily.
At the moment the market capitalization of DeFi reaches about $955.2 million dollars a year.
A market that, after the sudden drop of March 13th, has seen a continuous rise to almost $1 billion for tokens and stablecoins held.
Figures that are impressive when considering the potential expressed on February 15th, 2020 when the capitalization reached a peak of 1,253 billion dollars.
DeFi platforms such as BlockFi, Compound Finance, Celsius Network, Nexo and others should take on the role of safeguarding money, both against the increasingly obsessive inflation of fiat coins and against governments’ reckless use of its citizens’ savings.
These tools have all the potential to largely replace the national social security institutions of the countries of the world.
However, the recent Covid-19 crisis has revealed an already latent and serious crisis, the financial crisis, which has had a negative impact on the confidence and risk appetite of institutional investors.
We have seen the price of crude oil slide to historic lows, hitting the low of – $37 per barrel on April 21st, 2020. Dividends and the financial resources of all oil companies, including the automotive sector, plummeted.
Stock exchanges around the world went down like never before. Stocks and bonds have never offered secure gains or at least avoided strong depreciation as they were too tied to the DeFIcit performance of entire countries or large companies.
The American FED pumps billions of dollars into the market, inevitably causing it to depreciate in the medium to long term.
Whereas in Italy we have great financial figures such as Corrado Passera who insists on living the myth of Plato’s cave as one of the men who likes to be chained inside the cave without wanting to go out and appreciate the truths of the world.
He doesn’t want that. He would like to set an interest rate of 1.75% on the deposit in his bank’s 24-month escrow account against the rates offered by the DeFi platforms, which range from 6% to 8% per annum with withdrawal and capital insurance.
The Bank of Italy itself reveals in a survey of current accounts published in September 2019 how the costs of managing accounts and credit and debit cards have increased by more than 10%.
Where the monetary and economic policies of the different countries fail, cryptocurrencies, at least those with high volumes such as bitcoin, prove to be in the long run always stable and increasingly used as cross-border payment methods. And where surges in inflation or deflation create damage and instability for everyone, stablecoins instead deliver stability while leaving their relationship with the dollar constantly unchanged.
If bitcoin becomes increasingly mature in terms of payment methods, combined with the management of savings and most investments on secure, efficient and trust-free platforms, then we can say that the future of fair finance is definitely DeFi.