The Decentralized Finance Initiative (DeFi), is revolutionizing the way people around the world view money. It’s faster than any financial revolution before it. The status of the banks, who have held the keys to money access since antiquity is now being challenged. DeFi is now offering an alternative to banks that could change the economic landscape and allow for greater access to finance.
This shift in power away form governments and banks towards real people is long overdue, especially in developing countries where DeFi has already emerged as a tool to remittances or small loans. DeFi’s financial inclusion can be a significant benefit, especially when there are still 1.7 billion people who are not banked.
Related: The great unbanking. How DeFi completed the job Bitcoin began
It is amazing to see the DeFi market grow. DeFi is a trustless platform that takes concepts from traditional finance and turns them into transparent protocols via smart contracts. It can deliver anything, from insurance to loans to savings. DeFi’s financial products have a nearly $175 billion total value. This is a clear sign of their appeal.
DeFi is on the rise, and governments and banks don’t want to lose control over the monetary system. They are now focusing their attention on issuing digital currency. The central bank digital currencies (CBDCs), which are issued by the central bank, can be used to maintain control of the monetary system and allow users to make faster and more affordable transactions. What elements of decentralization are we likely to see in our daily lives if we fast-forward to 2030?
DeFi for the future
If you’re lucky, the year 2030. Celia, a young Parisian lady, grabs her phone to purchase a Eurostar ticket between Paris and London. She selects her primary digital wallet when she reaches the payment screen. Celia checks her wallet to see that her digital euros balance has decreased. Celia realizes that no one has cash savings anymore. Loans can be taken out and repaid within the wallet of a person, depending on their assets. They are also paid back over time.
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DeFi plays a major role in 2030. However, CBDCs have also become the default tool of banks around the world. China has been a leader in this area, following its success with previous trials. They lean towards greater state control, scrutiny, and censorship. DeFi is now the main way people who value freedom manage their finances. It also supports the global financial system. DeFi has become so prominent that we no longer need bank accounts. We can access our money from anywhere, and take out loans when needed.
Cryptocurrency’s goal to make money worldwide available means that the underlying DeFi protocols provide liquidity for swaps, borrowing, and lending. End users don’t know they are interacting directly with global liquidity sources, despite the complexity of DeFi. Complete privacy is guaranteed on all DeFi spending and spending.
We also transact international payments using layer two zero-knowledge-proof rollups (zk–Rollups). This scaling solution bundles hundreds of transactions off-chain into one Ethereum smart contract, helping to reduce blockchain congestion. A cryptographic proof known as a SNARK is generated, which is used to verify the validity of the transaction and is posted on layer 1. Bitcoin (BTC), Ether(ETH), and other permissionless stablecoins provide open and free alternatives to government money. They can be used immediately and exchanged for any major government coins.
Defeating DeFi’s Challenges
This is a possible future for DeFi, judging by the way it is moving. To reach the utopian future many might consider DeFi, there are some obstacles that must be overcome.
Consider the obstacles to widespread adoption. Consider, for example, smart contracts’ vulnerability, unpredictability in the DeFi market, regulatory issues, and access to emerging technologies.
Others centers revolve around the space being too complicated for the average trader and investor. Blockchain inefficiency is an issue that must be addressed. This includes energy consumption and transaction costs on Layer 1 protocols of the blockchain. Alternatives have not yet provided security but early-stage technological solutions will. ZK-proof cryptography or layer-two solutions are examples of such a solution. They allow for more transactions to be stored in fewer spaces and reduce costs.
Some of DeFi’s problems can’t be discussed without mentioning the naysayers. Dan Berkovitz (Commodity Futures Trading Commission) believes DeFi is a “bad Idea.” Tom Mutton (Bank of England’s Fintech Director), said that any CBDC would be “ten-times more efficient per transaction than Bitcoin. But, it begs the question: Does he know that zkrollups are already 1000 times more efficient than Bitcoin?
What can DeFi do to overcome these obstacles?
Education is essential. One organization that aims to educate policymakers about the DeFi ecosystem is the DeFi Education Fund. It also tries to create a regulatory framework. It is funding DeFi-related research, advocacy, legal research, and DeFi practices in an effort to increase knowledge. As more people become familiar with DeFi, mainstream adoption will become easier.
Related: Education is key to mass adoption of blockchain technology
An alternative way to increase the number of users is to improve the user experience. This can be seen already with layer-two protocols which are creating wallets and infrastructure to support DeFi. They remove friction and costs, provide better methods for users to retrieve lost keys and make the space simpler.
In the long-term, however, regulatory clarity will be a boon to traditional investment service providers like banks and institutions. It will also create a pathway that allows users to access DeFi at their own terms through existing apps. This is a great thing because customers won’t know they’re interacting with a Blockchain behind-the scenes. All complex wallet interactions will be hidden. This collaboration between traditional finance, decentralized finance could be what DeFi needs to expand into the mainstream.
Related: DeFi: What, who, and how can we regulate in a code-governed, borderless world?
Take action immediately
DeFi is here to stay, and it could be the center of finance by 2030. To make that happen, however, there is more to be done.
As more countries experiment with CBDCs and more governments adopt them, DeFi is facing a growing threat from CBDCs. DeFi will still be a part of the future world, even though CBDCs are growing at a rapid pace.
However, DeFi is the future if you want to manage your money, know where it came from, and give access to banking to developing countries. CBDCs will need the core components of DeFi infrastructure in the future, including decentralized exchanges(DEXs), borrowing & lending protocols, exchange-aggregators that automatically find best prices and cross chain bridges. This is if these government currencies are to be interoperable with one another and be fully digital money.
DeFi serves as an innovation laboratory. It allows different infrastructure issues to be tested at breakneck speed and ensures that CBDCs have the right infrastructure available before they roll out globally. CBDCs will be able to take advantage of rapid innovation in public Blockchains and DeFi. They will also benefit from connection to large liquidity pools that allow users to instantly switch between Ethereum and digital euro, or use DeFi infrastructure for a return on the digital pound.
Similar: Understanding the systemic shift in financial services from digitization and tokenization
The CBDCs that are intentionally disconnected from DeFi will be the ones that lose out to private stablecoins, which is one of the fastest growing segments of the crypto industry. We don’t have to rush to make it a reality. DeFi must overcome many obstacles before mainstream adoption can be made a reality in daily life.
Celia, our Parisian friend, may not be aware or care about which part of her transactions are CBDC/DeFi by 2030. It shouldn’t matter to Celia. It is possible, but it will take a lot of effort to make this a reality. Celia hopes to be one of many millions who will enjoy the brighter lands of a decentralized world of finance by 2030. This will forever change the way we see money.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Will Harborne is the co-founder of DeversiFi and its CEO. This layer-two DeFi trading platform uses StarkWare’s scaling technology. Will worked as a technology consultant at IBM and Cambridge Consultants before moving into full-time work in the public blockchain space. He joined Bitfinex in 2017. He led several projects while there, before combining his knowledge with his passion for Ethereum’s ecosystem and permissionless innovation to help create Ethfinex. Will is a member the Melon Technical Council, which was one of the first major governance experiments in a blockchain-based protocol. He is also a graduate of the University of Cambridge in Engineering.