The growth potential of decentralized finance (DeFi)

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Decentralized finance (DeFi) has been a hot topic lately which, for those not too involved in the fintech scene, has seemingly emerged from the shadows of obscurity.

Simply put, DeFi is a system where financial products become available on a public decentralized blockchain network. This means that they are open for anyone to use, rather than going through intermediaries such as banks or brokers.

More specifically, DeFi enables a system where software written on blockchain allows buyers, sellers, lenders and borrowers to interact peer-to-peer or with a strictly software-based intermediary, rather than a business or institution that facilitates a transaction.

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This presents new investment alternatives that virtually anyone can access, bypassing the strict regulations that traditional financial institutions have worked so hard to establish.

It also opens up the same stakeholders who benefit from DeFi at the same level of risk if they don’t understand it properly, especially due to how unregulated and open the system is.

Should we therefore be wary or get on the train that these investment opportunities present? Will DeFi be sustainable in the long run or are they just a risky trend?

From a round table a Wild Digital SEA 2021, we listened as DeFi experts from the SEA region shed light on some of the complexities surrounding the DeFi landscape and where it is headed.

Moderated by David Low, the general manager of Luno in SEA & Australia, the panel was joined by:

The nature of finance has changed

The virtual stage of Wild Digital SEA 2021

What we once knew as traditional money and investment goods is being decentralized, creating new digital currencies and digital assets that will dictate the economy of the future.

In the past 10 months alone, Sean Lee has pointed out that while DeFi is still in its nascent stages, some of the most unexpected trends that have occurred in the market is the speed of innovations that emerge.

“The value of money is changing very rapidly,” Sean said. “Investors and asset holders are constantly looking for other asset classes to seek capital, both from a retail and institutional perspective.”

Also, due to the way DeFi tends to mimic the financial systems we see in the real world, it is it opens up investment opportunities for those in underserved markets also. Therefore, making financial services more accessible and inclusive overall.

Michael Wu agreed, sharing that Amber Group saw a clear change in attitude towards DeFi. People have gone from being dismissive of him to now hugging him with a level of curiosity to understand him.

Interestingly, Michael also noticed that people have a clearer question and better understanding of what they want from DeFi. They can range from users interested only in final returns on investments, to more sophisticated ones who want to be more deeply involved in building the DeFi ecosystem.

But first, there are several obstacles to overcome

David asked Ken a question about what he thinks are the main obstacles preventing DeFi from potentially widespread adoption with the technologies available today.

Ken first claimed that the The current UX and UI for DeFi today is cumbersome and complicated to say the least, even for crypto natives. Performing an action requires multiple clicks, and the language used isn’t the most intuitive for newcomers who have little or no knowledge or experience in the crypto space.

“Many of these things are still being built today, in terms of innovations that are coming out of community-driven developers and aggregators to help power the current and hopefully the general user down the line to understand. space, “Ken explained.

Image Credit: Pexels

Additionally, general education and investment knowledge is required when trading within the DeFi space. This is especially true for DeFi products that mimic financial systems already in the real world, such as interest rate swaps, buying and selling stocks, or borrowing and lending money.

But at the same time, there are also many crypto-native innovations in development that don’t exist in traditional financial systems. Ken believes there is still a big gap, and therefore Many new investors may not fully understand the potential risk-return of investing in DeFi.

There is also a lack of much-needed regulation

An anonymous audience member asked the panel a question, which David presented to the experts.

The United States Secretary of State (US SEC) questions the very nature of DeFi, stating that it has a “lack of transparency and pseudonymity structural obstacles that are bound to hold back the development of the market until the adequate guarantees for investors “.

Sean was the first to present his point of view in response to this.

“It sounds like a lot of fun because for those of us who are in the industry, DeFi has the utmost transparency. You have maximum traceability in all transactions, especially when it comes to a public blockchain, “he said.

“So the notion of transparency is actually enough Interesting from that point of view, because if you know how to follow it, everyone can actually do the same thing. “

He reiterated Ken’s point about the need for education as the key to helping the public understand DeFi, along with the associated risks.

And to do that, the public should first understand what cryptocurrencies and blockchain do. These elements work together, with blockchain as the technological infrastructure and crypto as the transactional layer.

A screenshot of Luno’s interface / Image credit: Luno

Sean appreciated the adoption of DeFi over that of the Internet, where people went from being wary of data privacy 10 years ago to using cloud computing on a daily basis.

Ken agreed and added, “DeFi is an unstoppable technology that is gaining adoption over time.”

Michael shared that he saw more encouraging results, with players becoming more open towards DeFi and cryptocurrencies. He also claimed that Regulations are needed to help space grow further.

With regulations, there will be more clarity for entrepreneurs in planning their businesses, innovations and products.

“When there are regulations, there is a framework to innovate around”Said Michele. “As long as regulators tell us what’s good and what’s not, where the boundaries are, what things they really care about, then I think there’s a solution around that.”

Ken spoke with his field experience in Singapore. He said regulators have been very accommodating, even proactively trying to learn from DeFi industry players to implement applicable laws based on expert feedback.

“I think overall it’s very good for general cryptocurrency adoption, our security measures in place and investor protection. I think it’s all going in the right direction,” Ken said.

Get a piece of the pie

Before the session ended, the experts were asked to share their advice on how the average Joe might attempt to enter the crypto space, as it is the stepping stone to DeFi as a whole.

Sean watches it from 3 groups, where there are developers, partners (infrastructure builders) and holders of cryptocurrencies.

It encouraged emerging developers to enter the crypto space first. It doesn’t matter which protocol is chosen or where they start from, the point is to get started.

As for partners who are actually building the DeFi infrastructure, they need to choose a protocol or platform to focus on and understand how to make it sustainable (both from a business longevity and an environmental perspective).

Finally, Sean advised cryptocurrency holders to educate themselves in an ever-changing space.

“Don’t think it’s just another token or stock that you can just buy or sell. If you are an educated trader in the conventional world, you can probably handle cryptocurrencies. But if you are uneducated and just follow the trend, then the danger will be there, “warned Sean.

Ken added that joining platforms like Abra and Amber Group would also be a good start for those who don’t have the time or a lot of knowledge in the crypto space but want to generate returns. To which, Michael joked that obviously you shouldn’t bet your house on it, but only invest what you can afford to lose.

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Getting involved in cryptocurrencies and DeFi generally has similar notions to the game in the stock market. There is a high level of understanding and education that must take place within the space, and similar risks apply if you use it irresponsibly.

There is still a lot of DeFi training that needs to be done before we see more widespread and safer adoption around the world, but once that happens, we will likely see snowball use.

  • You can read more coverage of the Wild Digital panels here.
  • Read other fintech content here.

Featured Image Credit: Ken Chia / Sean Lee / Michael Wu

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