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Decentralised Finance: Usecases & Risks for Mass Adoption

This report explores current developments in Decentralised Finance (DeFi) and its emerging role as an alternative to the traditional banking ecosystem, especially in Europe. By delving into the potential risks and future evolutions of the DeFi economy, the current progress and necessary steps are evaluated to ensure this blockchain-based finance system sees the same level of security the traditional market has.

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To find out more about how DeFi is changing financial services in Europe, download the full report.

While over the past decades our global economies have become closer via the internet, our currencies have remained state monopolies. While several improvements have been made to how financial services are accessed, the industry has not seen a great deal of innovation, and new services remain highly fractured. 

DeFi solutions are emerging as an alternative to the traditional banking ecosystem. This report investigates the multitude of emerging DeFi applications and functions by offering an in-depth analysis of the challenges they currently face and the potential fixes. Largely, this is an investigation into how finance could work in the years ahead.

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What is Decentralised Finance and Money Legos?

To find out more about how DeFi is changing financial services in Europe, download the full report.

DeFi stands for “Decentralised Finance”, which is currently a microcosm of the traditional financial and blockchain ecosystems. It refers to a stack of applications running primarily on blockchain technology to create multiple types of financial services and products. 

DeFi is promoted as the means of empowering users and developers to create unique peer-to-peer experiences that would, otherwise, rarely happen in finance due to the nature of stringent regulations. 

Its main tenets are that it is:

  • permissionless
  • censorship-resistant
  • final and fluid
  • programmable

DeFi apps rely on stablecoins and digital assets, like DAI or USDC and Ethereum. DeFi’s main improvement on FinTech is that it brings the same concept of legos - stacking or composability - to financial applications, giving them the moniker of Money Legos. In other words, the DeFi ecosystem makes it possible to take out a loan on one platform, perform a leveraged trade on another, and exchange it back to the base asset through a decentralised, blockchain-enabled exchange. As a result, composability enables DeFi to have a wide range of use-cases where it outperforms its traditional counterparts.

What are the main risks and potential fixes in DeFi?

To find out more about how DeFi is changing financial services in Europe, download the full report.

As with any new industry, the early days are marked by losses and mishaps along with innovation and growth. The crypto industry is no exception: over the past years, it has been characterised by a high number of hacks drawn by the lure of direct access to capital. However, the DeFi industry is well aware of risks, and is working to overcome such challenges in order to make this decentralised industry scalable for mass adoption.

The greatest security risks which DeFi industry must deal with are:

  • Lack of data - Data collection methods in DeFi are still being developed, but the nature and complexity of available data has increased significantly in recent years.
  • Requirement for monitoring transactions - DeFi applications need more comprehensive checks to ensure transfers to the right addresses. We already have a few potential solutions such as human-readable wallet addresses.
  • Compliance issues - The DeFi ecosystem needs regulatory bodies to provide greater support in case of price slippages and regulatory scrutiny. Organisations are emerging to provide better earlier support and one click regulatory solutions.
  • System Failure - Since the DeFi ecosystem is not fully established, users need to minimise the risk of potential failure. The last step towards this goal is the financialisation of risks through insurances and verified smart contracts.
  • Hacking - Since DeFi projects have proven to be successful hacking targets, the DeFi industry is developing sandboxes and clear frameworks for dispute resolution.
  • Asset price information - By auditing smart contracts, the DeFi industry is trying to provide ways to detect and solve bugs quickly.

What’s next in DeFi?

To find out more about how DeFi is changing financial services in Europe, download the full report.

DeFi is seen as one of the main leaps to crypto mass adoption. With wider adoption and further improvements, people may be able to handle their financial lives solely through blockchain-enabled DeFi applications. Therefore, while growth may not be smooth, we predict that DeFi will play a large role in the future and provide a workable alternative to the current banking system.

  • After integration between traditional FinTech players and crypto-native projects, stablecoins and remittance systems will become a critical component of long-distance payments.
  • Large audit firms, such as Deloitte and KPMG, will help clients interface with the DeFi ecosystem by acting as intermediaries between this new sector and the traditional financial system.
  • Effective and affordable insurance will make DeFi a trillion dollar industry, as millennials and GenZ users look for higher yields and to grow their savings in the face of dwindling state pensions.
  • Traditional financial institutions will have to offer their first DeFi-enabled savings and pension accounts as Europeans look to increase their passive earnings.
  • Games that give tokens for participation, will provide incentives for thousands of gamers to enter Decentralised Finance. These communities will be the entry point to DeFi for the youngest generations.
  • Since DeFi developers’ priority is to scale, there is a likelihood that major hacks (such as the DAO hack of 2016) will occur again.