In this modern world of technology, the banking industry has started seeing DeFi as a disruptive force and significant growth engine. With the use of DeFi (Decentralized Finance), millions of users are now lending, borrowing, trading, and saving without any permission from companies that won’t be interested in their buyers or clients. Day by day, the DeFi sector is growing constantly in terms of total value and number of users. And this means that DeFi will definitely impact the process of development of fintech apps in many ways. Fintech Industry, to know about it in more detail, let’s go through this blog.
What is DeFi?
Using technology for financial services is not at all a new concept for the world. The majority of the transactions at financial services companies or banks are accomplished by using technology. But, the role of technology is somehow restricted to just being a facilitator of financial transactions. Many companies still have to fight with the navigation process where they are legalese of jurisdictions, they have to compete for economic markets and standards that are responsible for making smooth transactions.
With the availability of many common software protocols and public blockchains to create them on, decentralized finance (DeFi) places technology at the center and front of the transactions in the financial industry. DeFi is a term for a variety of financial apps in blockchain or cryptocurrency which are prepared to disrupt financial intermediaries.
DeFi (decentralized finance) is something that draws its inspiration from blockchain, the technology that is behind Bitcoin, the digital currency. Blockchain technology enables various users to have a copy of a history of transactions. This means that it isn’t controlled by a central source or a single entity. This is very important as centralized systems can limit the sophistication and speed of transactions.
Decentralized finance is different from all this as it has the capability to expand the use of blockchain technology from a simple fund transfer to more complex use cases of finance.
What are the Components of DeFi?
If we talk about the broader level of the DeFi components, they are very similar to those of the current financial ecosystems. This means that they require a huge variety of use cases and stable currencies. The components of DeFi take the form of stable services and coins like lending services and crypto exchanges.
To make the DeFi applications work perfectly, smart contracts offer a framework that enables the encoding of the terms and activities required for the functioning of financial services. For instance, a smart contract is something that comes with a code that enables the creation of the exact same terms and conditions of a loan. And if those terms or conditions are not met, the monetary deposit could be liquidated.
All the components that are required in a decentralized finance application fit into a software stack. The components of each layer are meant to perform some kind of function in the creation of the DeFi software or application. The four layers that comprise the DeFi tech stack are –
- Settlement Layer
- Protocol Layer
- Application Layer
- Aggregation Layer
How can any Company Become DeFi Ready?
In this phase where DeFi is growing so much, fintechs should ask themselves why users want financial products that are decentralized. For instance, DeFi users tend to lend their money on Aave, one of the largest open-source decentralized lending protocols. And they earn between 7% to 14% APY. And financial software development services providers must be aware of the reason why users aren’t moving on to Save.
DeFi is still a burgeoning space that comes with various risks like volume shifts and market manipulation that comes with the arrival of liquidity. Because of this, fintech app developers have prioritized creating powerful protocols with flexible infrastructure in spite of optimizing UI.
Though many people are using DeFi and controlling their wallets very comfortably, they are still a minority. But because of the user experience, fintechs are unable to lose their lead anytime soon. This shows that one of the best ways to preserve and grow the user base is by offering native access to DeFi protocols such a way that takes away any barriers. So try to not avoid DeFi, the financial software development companies must think of different ways to integrate with these new apps.
What to Watch out for in DeFi?
As we know by now, the future of DeFi is definitely promising, but there are a few things that might rightfully give us pause for now. For instance, like Bitcoin and other cryptocurrencies, DeFi is a tech that is still in its infancy. This means that it can be prone to bugs, security, and scalability issues. Besides, DeFi is still not insured by the FDIC and this means that there is a chance where the participants can lose their capital.
Though there are a couple of risk factors when it comes to using DeFi products, there is a big learning curve that enables the developers to become experts in this technology and create systems that are safe for the investors who are interested to enter this emerging market.
With time there will be new risks with this technology like any other but the risks come with an urge to create a solution. So DeFi will be perfectly safe for both first-time investors and individuals who are experts in the field of investments.
How can DeFi Change the Future of Investing?
As per the famous economist, Kiguel, though the stock markets are open from 9:30 AM to 4 PM EST, a DeFi mechanism will take over by allowing 24/7 trading without the issue and interference of brokers. The decentralized system enables democratized trading which treats all the participants equally through DeFi. This shows that DeFi not only protects individuals from third-party interference when it comes to their money or funds but also enables the investors to earn money.
So, when the user deposits the funds into a fixed yield product, money market account, or annuity, they must think of companies, transactions, and processes, as it is all that takes to have that happen safely. But at every step of this process, fees are taken by the middleman which makes the users earn much less than expected. The removal of middlemen can make users earn about 8%. This proves that if you directly connect the lenders and borrowers, they can earn more, and this is what decentralized finance (DeFi) does.
All this proves that DeFi is a concept that will open up more banking and investing opportunities regardless of your financial status. To invest in DeFi you won’t have to be a millionaire and open a brokerage account. You would be able to start with a few dollars as the platforms don’t come with a bottom line. You will be able to do so by installing the DeFi app on your computer or smartphone.
DeFi has the potential to expand the concept of investment in finance and it comes with some amazing options to do so.
The Race of DeFi
It is quite evident deciding to offer access to decentralized finance is easy but the process of getting ready for DeFi is the most difficult part for the majority of the fintech companies. Having awareness of DeFi’s protocols and sticking up to them can make your application stay in the market for a longer period of time. So, if you are a financial service provider, stick up to the protocols for a longer period of time and don’t just hop in & out of it.
When you decide to become DeFi-enabled for your users, hire the best Ethereum developers available in the market to help you out in the process. Besides, when it comes to finances, time is a very important essence and this is why fintech developers must use DeFi guides that come with a proper explanation of everything they would need.
As seen in this blog, the growth of cryptocurrency and decentralized banking functions has started impacting financial services and will continue effecting in the upcoming years. This means that whether you like it or not, you must educate yourself with DeFi and its functionalities so that you can benefit from the changes that are going to come.
Though DeFi (decentralized finance) is considered a complicated technology, it can help in making the user’s financial transactions more secure and less expensive. It can also increase its access to everyone and not keep it for certain demographics. This proves that DeFi will certainly impact the future of the financial software development industry and if people will be ready to learn it, they will be able to get on board easily to take all the benefits.