Edul, is an erudite entrepreneur. Edul brings with him over 10 years of experience deep-rooted in finance, entrepreneurship, and building tech-driven applications. He graduated in the year 2011 from India’s most prestigious school of engineering – IIT Bombay. Post-graduation, he joined Deutsche Bank as a Senior Business Analyst. During his tenure, he worked in FX Risk and Margining desk and led the product management as well as business development wings of a real-time risk management portfolio. Previously Co-Founded Niffler, a $1Mn funded startup by SAIF partner. Niffler got acquired by Tapzo where he led the product team to build the core Infra and App.
Financial services are one of the fundamental pillars of any economy. With the rapidly evolving landscape of this sector, economists are already advocating a wide-scale adoption of decentralized finance. One doesn’t need to look past the recent Coronavirus pandemic to realize how these unprecedented events can bring the entire financial system to a standstill. The financial crisis of 2008 had then shown us how over-leveraged banks and financial institutions can crumble the global financial system.
How does DeFi work?
Decentralized finance or DeFi works on blockchain technology and does not depend on any intermediary. DeFi is a form of finance that is essentially more efficient and secure than conventional finance, which relies entirely on financial institutions.
Smart contracts are self-executing contracts that get executed when certain predefined conditions are fulfilled. These smart contracts are lines of code that are written on the blockchain network that cannot be altered once it is in place. DeFi uses the power of these smart contracts to completely eliminate the middlemen and thereby reduce the overall cost of transactions.
As of October 2021, the total market capitalization of DeFi is over $130 billion. The growth in the DeFi sector in such a short period speaks about the phenomenal response from the market that recognizes the potential of DeFi.
Why is there a need for decentralized finance?
The financial crisis in 2008 happened because the entire financial system was leveraged to the hilt. The whole economy collapsed as a result of the house of cards falling out. That occurrence was referred to as a ‘black swan event’, meaning such events are extremely rare. During the Coronavirus crises, the financial system was again under the hammer.
A strong economy can be built on top of an agile and efficient financial system. DeFi is the solution to building a strong financial system.
Use cases of DeFi
There could be several use cases for decentralized finance. One of the many problems that banks face is the time-consuming task of determining the creditworthiness of an individual to sanctioning and ultimately disbursing the amount. With DeFi, all these processes would take a fraction of the time that it currently takes. Another sector in which the current system struggles is the ‘insurance’ sector. Decentralized finance can provide automated insurance claims, secure audits, and reduce the paperwork massively.
Decentralized finance can streamline these processes with the current technological developments:
- Processing payments across geographies at a fraction of time and cost
- Anyone with an internet connection will have access to banking services
- Transparency is at the core of DeFi
Can DeFi cause a recovery in the economy?
In recent times, we have witnessed multiple nations where the local currency lost its value overnight. In such cases, the common people suffered the most as they had to depend on banking services. In these situations, banks usually halt their operations. DeFi could be a gamechanger in such instances.
Decentralized finance would ultimately reduce the hegemony of large financial institutions. It will essentially empower the economy, by bringing banking and other financial services closer to the general population.
DeFi’s untapped potential
It cannot be denied that the current financial services sector needs a much-needed revamp. DeFi has the potential to be the essential catalyst for that change. These are still early days for DeFi. With the speed at which technological advancements are shaping up, decentralized finance will soon coexist with conventional banking services.