Friday, April 12, 2024

DeFi: A finance revolution or a worry for regulators?

Bitcoin and several other cryptocurrencies have been in existence for over a decade. Even though the world is beginning to sit up and take notice of the potential risks and benefits of crypto use, cryptocurrencies are yet to be recognized as alternatives to what we know as ‘money.’

A much more likely alternative is now in the works. DeFi or decentralized finance is a financial universe of its own. It consists of autonomously running applications, most of which are on the Ethereum network. Across the DeFi apps, users can perform numerous functions – from depositing digital assets to earning returns to borrowing money and more.

DeFi is set to be a revolution, particularly for tech-savvy investors. In May 2021, the market cap of DeFi tokens reached almost $150 billion, with total assets worth $100 billion having been invested in the applications.

However, while DeFi holds a lot of promise, it poses a lot of risks, particularly for traditional financial markets. Many experts who have been critical of DeFi share a common fear – DeFi will eliminate institutions such as exchanges, brokers, and banks. This would mean that the global economy will eventually turn into a space for investors who are only concerned about their individual outcomes. Experts have also suggested that regulating the DeFi space will be a far tougher task than regulating cryptocurrencies.

While the adoption of DeFi still hasn’t become the norm, its rapid rise indicates that the day isn’t far away when it’s in a position to compete with traditional markets. Whether that day will be a revolution or a cause for concern for market regulators is yet to be ascertained.

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