Decentralized Finance (DeFi) is changing the way people worldwide think about money faster than any previous financial revolution. Banks, which have monopolized the handling of money since ancient times, are finally seeing their position in question. Now DeFi is beginning to offer an alternative that could transform the economic landscape and democratize access to finance.
This seismic power shift away from governments and banks to the real ones is long overdue, especially in developing countries where DeFi has emerged as a tool for money transfers and small loans. Financial inclusion is another significant benefit DeFi can offer, especially given that 1.7 billion adults do not have a bank account.
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The growth of the DeFi space is amazing. By adopting concepts from traditional finance and transforming them into transparent protocols through smart contracts, DeFi provides a trustworthy ecosystem that offers everything from insurance to payments, loans to savings accounts. The appeal to DeFi is obvious, with the total value of the assets held in DeFi’s financial products amounting to nearly $ 175 billion.
However, with the advent of DeFi and governments and banks unwilling to lose control of the monetary system, they are turning their attention to self-issuing digital currencies. Central bank digital currencies (CBDCs) are seen as a way to keep control of the monetary system while allowing users to make faster and cheaper transactions. If we fast forward to 2030, what elements of decentralization can we expect in our daily lives?
DeFi in the future
Imagine this year is 2030. Célia, a young Parisian, pulls out her cell phone to buy a Eurostar ticket from Paris to London. When she gets to the payment screen, she selects her main e-wallet. When Célia switched to her wallet, she found that her digital euro balance had decreased. Nobody keeps savings these days as loans can be borrowed and repaid based on the value of their own property in a person’s wallet and repaid automatically over time.
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While DeFi will play a huge role in 2030, CBDCs have also become the standard tool for banks around the world. China leads after the success of previous tests. However, they are more prone to government control, surveillance and censorship. As a result, DeFi has become the primary tool that individuals use to value freedom of choice in managing their finances and is now the foundation of the global financial system. And because of the importance of DeFi, we’ve moved away from bank accounts so we can access and use our money anytime, anywhere, and borrow when we need it.
The purpose of cryptocurrencies is to create universal money around the world, which means that the underlying DeFi protocols provide liquidity in exchanging, borrowing and borrowing. And despite the complexity of DeFi, end users are not aware that they are interacting directly with these global sources of liquidity as complete privacy is guaranteed on all DeFi and spending.
In addition, we process all international payments on a second-tier zero-knowledge rollup (zk rollups), a scaling solution that packs hundreds of off-chain transactions into one intelligent Ethereum contract, thus helping to reduce the congestion of the Reduce blockchain. A cryptographic evidence called SNARK is generated to ensure that the evidence is valid and is published on layer one. Offers free and open alternatives to government coins, Bitcoin (BTC), Ether (ETH) and permissionless stablecoins that are used immediately and exchanged for any major government coin.
Defeat the DeFi challenges
The path DeFi is taking is certainly a logical future for it. But in order for DeFi to achieve what many might consider a utopian future, a number of hurdles must first be overcome.
One area to consider is barriers to wide adoption. For example, the vulnerability of smart contracts, the unpredictability of the DeFi market, regulatory problems and the accessibility of new technologies.
Other hubs in the room are too complicated for casual traders or investors. And blockchain inefficiencies are an issue that needs to be addressed, especially in terms of energy consumption and transaction costs with Layer 1 protocols on the blockchain. While the previous alternatives have been compromised in terms of security, technology solutions are prioritized at an early stage. Examples of this are anti-ZK cryptography or layer two solutions that pack more transactions into space and thus reduce costs.
Of course, some of DeFi’s challenges cannot go unnoticed without mentioning its opponents. For example, Dan Berkovitz, commissioner for the Commodity Futures Trading Commission (CFTC), thinks DeFi is a “bad idea”. And Tom Mutton, the Bank of England’s chief fintech officer, has said that any CBDC will be “ten times more efficient per transaction” than Bitcoin. However, one has to ask oneself whether he realized that zk rollups are 1,000 times more efficient than Bitcoin?
What is DeFi doing to break these barriers?
Need more education. The DeFi Education Foundation is an example of an organization trying to educate policy makers about the benefits of the DeFi ecosystem and help create a regulatory framework for the ecosystem. In an effort to expand DeFi knowledge, it encourages applicants to work on DeFi research and engage in DeFi legal research and practice, among other things. With an increasing understanding of DeFi, mainstream adoption becomes easier as new users are introduced.
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Another way to increase the number of users is to improve the user experience. This has been observed with Layer 2 protocols that build wallets and infrastructures that support DeFi. In this way, they avoid frictions and costs, and provide users with better ways to recover lost keys while making space less complicated.
In the long run, however, it is regulatory clarity that creates trust with traditional investment service providers such as banks and institutions and creates a way for users to access DeFi on their terms in existing apps. The great thing about it is that a lot of customers don’t even know they are interacting with a blockchain behind the scenes as all the complicated wallet interactions are hidden. It is this partnership between traditional and decentralized funding that could give DeFi the boost it needs to expand further into the mainstream.
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It’s clear that DeFi will stay here and could become the core of finance by 2030. However, much more needs to be done today to achieve this.
Right now, the growing proliferation of CBDCs is both a threat and an opportunity for DeFi as more countries experiment with them and governments begin to adopt them. However, just because CBDCs are accelerating doesn’t mean DeFi can’t find a place in our future world either.
However, if people want to control their own money and know where it’s coming from, while giving developing countries access to banking, then DeFi is the way of the future. The core elements of the DeFi infrastructure, such as decentralized exchanges (DEX), credit and credit logs, exchange aggregators that automatically find the best prices, and cross-chain bridges will also be needed by CBDCs in the future if these state coins are to become interoperable and can be used as a fully digital currency.
As a result, DeFi acts as an innovation lab, making it possible to test various infrastructure problems at lightning speed and to ensure that the infrastructure exactly meets the requirements of the CBDCs. Adaptive CBDCs, to take advantage of the rapid innovation in public blockchains and DeFi, will benefit from connectivity with large pools of liquidity that allow users, for example, to instantly switch between digital euro coins and Ethereum, or to use the DeFi infrastructure to to benefit from the digital pound.
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It is CBDCs purposely segregated from DeFi that will lose to private stablecoins – one of the fastest growing parts of the crypto industry. However, we do not need to rush to make this a contemporary reality. There are many hurdles that DeFi has to overcome before the mainstream finds its way into everyday life.
By 2030, our Paris friend Célia may not know or care what part of her transactions are CBDC and DeFi, and she doesn’t mind. There is still a lot to be done to make that happen. We hope that by 2030, Célia will be just one of hundreds of millions of people enjoying the bright highlands of a world of decentralized finance …