In the modern era of digital transformation, companies are pressured to continuously innovate to stay competitive against tech-enabled startups and fast-moving unicorns. This has led to a rapid shortening of the lifespan of companies at the pinnacle of success, creating space for new technologies such as Decentralized Finance (DeFi).
While in 1958, organizations included in the S&P 500 had an average length of stay of 61 years, today this figure has fallen to just 18 years. The pace of disruption is accelerating and it is predicted that by 2027, 75% of companies currently listed on the S&P 500 will disappear.
DeFi is going to take over the financial system
In the aftermath of the 2008 global financial crisis, the financial system faces numerous challenges, including inclusion and digitalization. Traditional finance (TradFi) has shown resilience, but at the expense of financial inclusion.
According to the World Bank, 1.4 billion people worldwide do not have access to a bank account. This often prevents “women, poorer, less educated and living in rural areas” from essential financial services and perpetuates the cycle of poverty.
“To achieve this, governments and the private sector will need to work hand in hand to develop the policies and practices needed to build trust in financial services providers, confidence in the use of financial products, new tailored product designs, as well as a strong and enforceable consumer protection framework,” said Leora Klapper, Chief Economist in Development Economics, Vice Chair of the Global Findex report.
DeFi is a blockchain-based form of finance that does not rely on central financial intermediaries. These include brokers, exchanges or banks that offer traditional financial instruments.
Instead, DeFi offers a plethora of financial services. From borrowing to borrowing and trading within a blockchain, DeFI ensures that transactions are publicly available, transparent and immutable.
Read more: TradeFi vs DeFi: Everything you need to know
DeFi is poised to rewrite the rules of global financial systems as it offers numerous advantages over TradFi. It enables real-time value movements, reduces barriers to entry and ensures users maintain control over their assets, to name a few.
“Long onboarding processes, as well as the amount of time involved in trade execution and post-trading activities, make TradFi much more expensive than necessary. The industry could reduce up to 80% of what it currently spends on post-trade settlement fees by making the most of blockchain technology. Overall, it is estimated that moving securities on blockchains could save $17 billion to $24 billion per year in global trade processing. costs,’” according to Concordium’s DeFi-TradFi report.
DeFi’s potential in the next bull run has caught the attention of the traditional banking sector. The daily transaction volume in this sector exceeded $10 billion at its peak, and escrow assets grew from less than $1 billion to more than $100 billion in a short two-year period.
Total value locked in DeFi. Source: DeFiLlama
DeFi’s decentralized structure fuels its rapid growth. It eliminates the need for middlemen, significantly reducing overhead and processing costs.
This is a game-changer for the unbanked population in emerging economies. Now they can access financial services without the need for a traditional bank account.
“By eliminating the need for intermediary asset management, blockchain enables the maximum efficient allocation of resources, ensuring that every member of society can have unbiased access to credit services. Blockchain is a powerful tool to rectify the catalog of inefficiencies within the traditional financial sector by streamlining processes and facilitating greater inclusivity and higher levels of global accessibility,” said Lars Seier Christensen, Chairman and Founder of Concordium.
Regulatory frameworks to promote adoption
However, if DeFi is to fully realize the potential of blockchain technology and drive mainstream adoption, a regulatory framework is crucial. Legal clarity will not only protect users but also prevent market manipulation, promoting financial stability in DeFi.
Furthermore, a regulatory framework will promote broader acceptance, adoption and trust. This paves the way for the exponential growth of DeFi in the next bull run.
“If they want to achieve mainstream adoption, DeFi and crypto must integrate some of the regulatory and self-regulatory practices that have brought TradFi functional stability. But there is also an urgent need for the stewards of the global economy to explore DeFi and crypto solutions to its many problems,” said Michael Casey, economic researcher.
Read more: 7 must-have cryptocurrencies for your portfolio before the next bull run
Integrating a self-sovereign ID framework at the protocol level can address Know Your Customer (KYC) compliance. This reduces the risk of identity theft or fraud while ensuring privacy and security. This regulatory framework significantly lowers entry barriers for businesses, making DeFi a mainstream financial solution.
Crypto regulation worldwide. Source: Statista
As DeFi continues to evolve and integrate regulatory and self-regulatory practices, it serves as a beacon of financial innovation. JPMorgan Chase and Bank of America are already exploring blockchain technology, signaling a promising transition to a DeFi-dominated financial ecosystem.
“DeFi applications require development to produce a differentiated product and positive user experience, which drives adoption and usage. Increasing adoption and use results in increasing revenue and appreciation of native tokens, if designed properly, both of which can be reinvested in development. [Althought DeFi applications are immature,] we are still in the early stages of a major change in applications that could occur over the next thirty years,” Bank of America reports.
With its potential to promote financial inclusion, reduce costs and foster innovation, DeFi could be the biggest winner in the coming bull run that would reshape the global financial landscape.