Decentralized Finance (DeFi) and Its Impact on Digital Payments
Decentralized finance (DeFi) is a digital protocol built upon blockchain technology. A public ledger encrypts digital transactions to form a “block.”
Once a transaction gets verified by users, the block “closes” while it remains forever on the blockchain.
DeFi derives from public mistrust in legacy banking institutions. Traditional financial services offer users a centralized form of making peer-to-peer transactions.
People who want to use cryptocurrency may do so for things like transactions among friends, conducting their small business, gaming, or gambling.
Let’s look at DeFi and its impact on digital payments.
The benefits of DeFi start with accessibility. Initiated as an obscure way of conducting financial transactions, DeFi grew from over 940,000 users in 2021 to 4.7 million at the beginning of 2022.
At the end of the year, there were over 6.5 million DeFi users. That represented an estimated 700% increase in two years.
To access DeFi financial services, all you need is an internet connection.
With an estimated value of $14 billion in 2022, the worldwide DeFi market size may rise to nearly $400 billion by 2031. That’d signify a compound annual growth rate of 45.16% over eight years.
Like smartphones and social media, the worldwide accessibility of DeFi offers a significant impact on digital payments without any geographical restrictions.
Another benefit of DeFi comes from lower fees via crypto exchanges and e-Wallets. Specific cryptocurrencies offer lower transaction fees, including Bitcoin Cash, Dogecoin, and Litecoin.
Users may experience reduced fees at crypto exchanges like Kraken, Coinbase, and Crypto.com. There’s also Gemini for the best security or Cash App for Bitcoin transactions.
Long-term users should consider transferring their digital currencies from an exchange to a digital wallet. Researching various “cold” and “hot” storage options is also helpful.
For example, Bitcoin users may transfer their BTC to an e-Wallet (hot) via the Lightning Network.
PayPal also allows users in U.S. territories to make crypto transactions in Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. However, users don’t “hold” their actual crypto. PayPal acts as an intermediary for trading at a spot price—there’s an exchange rate plus a transaction fee.
A DeFi app (dApp) like Strike uses the Bitcoin Lightning Network, which helps to eliminate fees.
Putting crypto into cold storage wallets allows users to take their crypto off and exchange or e-Wallet. Users may consider options from Ledger or Trezor for their hardware wallet.
Another essential feature of DeFi comes from its autonomy. Users may conduct financial transactions without any central authority. That allows them to buy and sell things without paying feeds to third-party companies.
Banking institutions may also hold sway over an account holder’s finances. That might create problems for users conducting international transactions.
With DeFi, one user could be in Chile while another resides in France. That might require three to five business days to complete in the traditional banking system.
If a crypto user makes a transaction, they remove the middle-man. That gives users more autonomy over their money.
Gamers find DeFi useful for the ability to transact anywhere in the world.
For example, some banks might not allow deposits at offshore gambling sites. With DeFi, playing real money roulette or online poker comes easier than traditional banking methods.
Using a DeFi platform might concern newbies regarding security. Many exchanges and cryptocurrencies went by the wayside in the last year or two.
DeFi users should do their due diligence to find a reputable platform or exchange to protect themselves from fraud or abuse.
The essential aspect of DeFi comes from blockchain technology that encrypts financial transactions. Once a transaction takes place, it can’t get altered or changed.
While users get that unique aspect of security with blockchain, human error remains a downside. However, that same issue comes with any financial transaction.
DeFi offers a public ledger for all transactions. That’s also useful for day traders to see if whales (high rollers) are getting rid of their crypto or buying more.
Transactions remain anonymous—but there’s a sense of security with encryption and transparency.
In the long run, any bad actors float to the surface while dedicated users and investors remain.
If you’re new to DeFi, you might have heard words like “stacking” or “yield farming.” Specific platforms offer decent interest rates for users who keep a balance in a particular account.
Users may hold “locked” tokens in escrow or via a smart contract. Those locked tokens become loans to other users—with lenders receiving interest payments.
Lenders also get transaction fees in exchange for providing liquidity to decentralized exchanges. They may receive newly minted tokens as an added incentive, as well.
Yield farming comes with risks like volatility and scams. Users should ensure the project they support is reputable and legit.
Earning passive income with yield farming offers a new form of investment opportunity regarding digital payments. An intelligent investor takes their time to learn about a new market by assessing its potential for valuable returns.
While newcomers may want to tread cautiously, DeFi brings plenty of upside for savvy investors.
One of the most significant roadblocks to DeFi comes from regulatory challenges. Institutional investors wait to inject their capital into regulated markets. However, the purpose of DeFi derives from banking and finance without a central authority.
That catch-22 keeps DeFi in its infancy, with new crypto projects falling as quickly as they rose. When crypto markets mature, long-term investors see how top crypto projects deal with volatility.
Bitcoin’s next halving event in 2024 may serve as a precursor for the next great leap forward.
In the meantime, why not improve your online roulette strategy to become a better gambler?