More and more people are growing increasingly frustrated with existing financial systems, which are vulnerable to hacks, inaccessible to many and prone to inflation.

With the rise of blockchain technology, the increasing popularity of cryptocurrency and the search for an alternative to traditional finance, many people now look to DeFi to resolve these problems.

But how will DeFi do this? 

Defining DeFi

DeFi — short for Decentralized Finance — is a blockchain-based form of finance that replaces existing financial institutions such as banks, brokerages or exchanges with self-executed smart contracts. 

By allowing users to transfer and store data and value in a peer-to-peer nature, DeFi boasts transparency, interoperability and accessibility. This makes it the perfect application for blockchain.

Many DeFi platforms are custodial platforms, though they should never be confused with wallets — as we wrote in an earlier post:

DeFi has an entirely different risk factor than a plain old wallet, so users should be wary about, say, HODLing their entire ICX bag on a single DeFi platform. Because, just like a bank, if a custodial platform suddenly goes belly-up, you’ll probably lose access to those funds too.”

Why would you use DeFi?

DeFi shares many similarities with banks. You can earn interest, borrow, lend, invest, buy insurance and more.

However, investing in DeFi entails higher risks due to crypto’s volatility, though it also yields higher potential rewards. 

Using DeFi is faster as it doesn’t require paperwork or a third party organization.

Anyone can open up a wallet from their home without going through verification, visiting a bank or providing personal information that can be leaked.

All you need is a device and an internet connection.

And since DeFi is global, you don’t have to worry about country restrictions nor currency exchange rates. There are also no central authorities that can restrict your access or payments in any way. 

In summary, users of DeFi have more financial freedom.

All of these advantages make DeFi the perfect alternative to your traditional bank account, and not just for crypto enthusiasts. 

What can you do on DeFi?

Users engage with DeFi by signing up through DApps (Decentralized Apps) such as Omm Finance, which runs on the ICON blockchain.

Here’s a non-exhaustive list of what you can do on DeFi:

  • Lend out crypto and earn rewards
  • Get a loan instantly without restrictions or paperwork
  • Buy and sell crypto
  • Put crypto into savings, earning interest
  • Buy derivatives (making bets on assets)

However, users should be wary of the security risks involved in DeFi. A report by Atlas VPN found that 76% of all major hacks in 2021 were DeFi related. Hackers can — and sometimes do — exploit DeFi protocols if they find weaknesses in the developer’s code. There are also few regulations or insurance systems when using DeFi, though that could change in the near future.

What next?

Ultimately, the next phase for DeFi is mainstream adoption. 

However, DeFi is very new and yet to fully shine. For example, a survey conducted by Coindesk Korea found that only 2.2% of student investors use DeFi.

That said, DeFi has shown tremendous global growth over the past year. It grew 88-fold in one year, demonstrating its infinite potential and possibilities. Omm Finance revealed that $200 million has been supplied to the platform in just about two weeks.

Once DeFi projects fully propagate, they may very well usher in a bright new future for finance, and of course, for the ICON ecosystem.