Touted as the next game-changer — much like the World Wide Web for internet banking — blockchain technology is poised to unlock a radically new decentralized finance system known as DeFi.
While it might be easy to dismiss this as another tech fad, as of 2022, DeFi platforms have already amassed over $200 billion in value. Meanwhile, the global blockchain market is projected to grow steadily to a whopping $163.83 billion by 2029.
The major difference between DeFi and traditional services is the “De” part, where the services exist in a decentralized fashion, without the need for an intermediary. This peer-to-peer model could dramatically change financial services as we know them.
Decentralized finance system will redefine P2P lending
Peer-to-peer (P2P) financial transactions are not new and predate the evolution of banking in our society. Current financial transactions likely grew out of the necessity to have a systematic way to verify the identities of individuals and businesses, thereby creating trust between transacting parties. This ultimately produced a system of laws that govern the enforcement of a financial contract between parties — which comes with its own set of problems.
Blockchain technology offers new ways of addressing these issues with lending by offering:
- A tamper-proof, virtual, global network that can span borders and regulatory regimes
- “Smart contracts” where actions can be taken automatically, based on the current metrics of the contract
As a result, P2P transactions can occur without the current guardrails of having trusted clearinghouses or a host of intermediaries. DeFi apps look to take advantage of all these features to enable financial transactions in a whole new way.
