Is Decentralized Finance (DeFi) Really a Game-Changer
No hype analysis based on facts
There are two types of people in the world right now: Crypto believers and haters.
On one hand, there are people who think that bitcoin is the only money in existence, DeFi is the only financial solution, and NFTs are the only real proof of ownership, and on the other side, we have people who think all of it is just a big scam.
How can there be so contrasting opinions about the same technology? Time and time again we have seen technology taking over the legacy systems: horses and cars, telephone and internet, etc. Still, with blockchain, we are back in the same game.
I can’t talk about everything blockchain is trying to solve in one post so here I will just look at DeFi and give you my unbiased opinion on it based on facts. If you are new to crypto, and still wondering ‘what the heck is this DeFi?’, here’s a brief introduction-
DeFi stands for Decentralized Finance. It uses decentralized ledger technology such as the blockchain to manage financial data and provide all the financial services for which we currently rely on central authority such as the banks. DeFi gets rid of intermediaries and instead uses smart contracts to automate and safeguard the entire process.
Now let’s look at some facts and get into the meat of this article and find out if DeFi is actually a game-changer.
The Growth of DeFi
Below are some statistics that prove that DeFi is growing at a tremendous rate and providing value to people which is unheard of in the traditional industry.
Screenshot from DeFi Llama
The most common metric to measure the growth of DeFi is Total Value Locked (TVL) which is the amount of wealth locked into all DeFi protocols. According to DeFi Llama, In March 2020, TVL was around $500M, now it is $114.05B and in May 2021, it peaked at over $153B across all blockchains.
According to Dapp Radar, DeFi is giving rates as high as 8% for deposits. According to Investopedia, the national average interest rate for savings accounts is 0.06% and the highest you can get is 0.7% APY.
Lending and Borrowing
Traditional services are only available to certain income groups, credit scores, and certain locations. DeFi opens up this market to anyone with an internet connection and there is no minimum capital required, you can also collect interest at any time. This is great in theory but later as we will see it’s not actually that accessible.
DeFi has created a plethora of new ways to make your money work for you. With a few button clicks, you can deposit money to earn interest on it, use it to get paid (as other tokens) to borrow more money using which you can again borrow more, put it in liquidity mining to earn more and it just gets crazier — You can watch this video on Benjamin Cowen’s channel to learn how to do this — No such thing exists in traditional finance.
According to Messari, trading volumes on DEX’s have grown by over 8000% compared to 2020. DeFi users have increased by10x and the supply of stable coins has increased 7x compared to Q1 2020.
According to a survey by fidelity digital assets, 36% of 800 respondents say they are currently invested in digital assets, and 6 out of 10 believe digital assets have a place in their investment portfolio. In March, visa announced that payments can be settled through USDC.
While these statistics look impressive and might convince you that DeFi will soon give a hard time to traditional services, in reality, that may not be the case.
Keep in mind that we got these stats during a bull run and during these times all the institutions and everyone shows interest in crypto and the same people are nowhere to be found during bear times. Many of the projects such as AAVE, COMP, etc don’t have a long history and they matured during this bull run. Best Free Crypto Trading Bots — Top 16 Bitcoin Trading Bot  Best crypto trading bots for Binance, Coinbase, Kucoin, and other crypto exchanges in 2021. Quadency, Bitsgap…medium.com
Challenges in DeFi
Below are some problems which are stopping DeFi from becoming a viable solution.
Massive exit scams and rug pulls are common in DeFi and formed 99% of all major fraud volume in the second half of 2020. Exit-scams and rug-pulls both involve insiders taking a majority of the user's and investors' funds. The difference is that rug pulls are initiated through a backdoor in smart contracts.
A lot of times users are aware of scams but they still go through with the hype hoping to get massive gains instantly and exiting.
In 2019, the amount of DeFi hacks were negligible, but in 2020 that number grew to $100M and we can expect this number to rise even more because of growth in value locked in DeFi. The most common method for the attack was flash loans, as they can be used to quickly influence the price and get away with a profit.
Most of the DeFi platforms are still fragile and a lot of times they are just a fork (copy) of popular projects with no active developer. These new platforms have lucrative rates which attract newcomers who think they have discovered the next big thing, only to be exploited by hackers.
Smart Contract Bugs
[Heatmap](dappros.com/201809/blockchain-developers-wo..): world blockchain developers by country, 2018**
Bugs and hacks go hand in hand as exploits are only made possible because of vulnerability in code. There are very few skilled developers relative to demand in blockchain space and these developers are creating the next asset management systems, exchanges, reliable data sources, and more.
I am a developer and I have tried learning solidity, and let me tell you, it’s not easy. The level of efficiency required to write valuable code is crazy. You need to make sure you are only storing valuable data in smart contracts or your clients would empty their pockets on just gas fees, and that’s just one example.
According to research conducted in 2018, 1 in 20 smart contracts is at risk for hacking.
Forget DeFi, most people aren’t even aware of what blockchain is how it works. Only the tech-savvy can find their way around using metamask to cleverly allocate funds in lucrative protocols for maximum gains. If you have done this before you might think ‘What’s so hard in it, it's just a 5-minute job’
I agree. you don’t have to code anything, file paperwork for loans, or get permission. Using DeFi is pretty straight forward but because governments have done no job to spread the technology or even put clear regulations on it, people are scared to even learn the tech. In reality, DeFi is not complicated anymore at least for just earning interest on deposits.
There are varying risks involved with liquidity pools, farming, staking, etc and you need to understand the tech to use them but from the recent rise in meme coins and scams, it is clear that people are interested in crypto and DeFi, it’s just that not enough effort is being put to teach people about these topics.
According to the consensus annual DeFi report, as of April 2021, there are 146 million unique Ethereum addresses, only 1.1 million addresses have over 1 ETH, and surprisingly only 1% of them use DeFi. Out of those users, I bet most of them are tech enthusiasts or investors.
DeFi was meant to provide banking services to the unbanked, the needy, the helpless population of the society, instead, it's serving the rich. Around 31% of the world is unbanked and most of them don’t have an internet connection or technical know-how to use DeFi. Best 6 Crypto Trading Signals Telegram Channels It is tedious to find the right crypto trading signals provider. So, in this article, we will be talking about the best…medium.com
It turns out that DeFi is just a small fish in the ocean amongst big players. By 2022, it is estimated that the financial service market is expected to reach $26.5 Trillion. DeFi is still very new, and it’s certainly not a big deal for big institutions. Most of the institutions show interest in tech to get media attention and get their name on headlines.
I expect DeFi to get much safer, useful, and grow by 20x in the next 4 years as many of the third generation blockchain projects such as Ethereum 2.0, Cardano, Polkadot would become more efficient. 4 years after that, I expect DeFi to become mainstream and even integrated with central banking services. Of course, all of this is just my wild speculation.
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