Why Entrepreneurs Can't Afford to Ignore DeFi Skeptic innovators are missing out on DeFi's amazing opportunities.
By Ariel Shapira Edited by Michael Dolan
Opinions expressed by Entrepreneur contributors are their own.
The internet is abuzz with content and conversations surrounding Decentralized Finance (DeFi). This term refers to a blockchain-based form of finance that does not rely on central financial intermediaries, and people have either loved it or hated it since its inception in 2018. The adoption of DeFi has drastically gone up since 2020. In February 2020, the total value locked of DeFi stood at $1 billion. As of January 2021, the total value locked of DeFi protocols stood at over $19 billion. That's almost 20x growth over the course of 11 months.
Most people only know of DeFi at the surface level — that it has the potential to broaden financial inclusion, facilitate open access, and that encourages permissionless innovation. DeFi skeptics typically don't have the full grasp of the opportunities it presents. For instance, many entrepreneurs have chosen to get on board because DeFi, by nature, removes many of the barriers to entry that prevented small/mid-size enterprises and startups from entering the market.
Ignorance is not bliss for entrepreneurs that choose to ignore DeFi. They miss out on the value of its many offerings and need to be aware of some of its top use cases.
Related: DeFi Is the New Lemonade Stand
Financial transactions without intermediaries
DeFi capitalizes on distributed ledger technology (DLT), otherwise known as blockchain, which removes the need for intermediaries in financial transactions, such as banks and agents. The intermediaries become replaced by smart contracts, thereby enabling peer-to-peer transactions and payments. Peer-to-peer payments open many doors for entrepreneurs, as they no longer have to factor cross-border payments, where the costs of money transfers (and the time it takes) serve as a disadvantage for both the sender and the recipient. The instantaneous and cost-cutting nature of DeFi transactions plays a large role in its scalability, especially among institutional investors.
By reshaping modern finance structure, DeFi has also created a new landscape for entrepreneurship and innovation. Thanks to DeFi's removal of intermediaries, financial services for the unbanked instantly become unlocked. This is a big deal when considering the fact that globally, about 1.7 billion adults remain without an account at a financial institution or through a mobile money provider. Through DeFi, they can delve into entrepreneurship on a global scale, and companies can also tap into an expanded market share.
Related: Getting Drawn Into DeFi? Here Are Three Major Considerations
Loans without collateral
Traditional financial institutions have mixed feelings about DLT, because DLT offers more to the borrower. DLT allows borrowers (who would not qualify for a loan from a traditional financial institution) to access funds from one or more investors directly. The loans are defined and monitored by smart contracts. Unlike banks, they do not require guarantees in the form of collateral.
The DeFi way of borrowing and lending is made easier when done through platforms such as TrustToken, which is popularly used to create asset-backed tokens that can easily be bought and sold worldwide. Its TrueFi protocol lets people borrow money without locking up their cryptocurrencies as collateral. The solution helps cryptocurrency lenders enjoy attractive, sustainable return rates while giving cryptocurrency borrowers predictable loan terms without requiring collateral. Transparency is, of course, a key component of such an offering.
Additionally, TrustToken is working on building a credit model, which would be a first in the world of DeFi.
Related: 4 Ways DeFi Can Generate Passive Income
Unique digital identities for transactions
One of the largest reasons people without bank accounts aren't able to make financial transactions is the lack of documentation to prove their identities, such as ID cards, passports, or credit cards. This also prevents them from enjoying benefits such as owning property, thereby limiting their freedoms and opportunities for growth. That barrier is lifted in the DeFi realm.
Digital identities serve one of the essential components of DeFi. This has nothing to do with social media presence or other online activities. Instead, a digital identity may be a profile linked to a device's IP address, for example, a randomly-generated unique ID. It can also be tied to a user ID and password.
Most businesses that offers goods and services can find its own unique way to use digital identities and DeFi. However, this is especially true for companies in the blockchain and crypto space itself, where fraud has unfortunately become rampant. Theft in the crypto industry jumped 40 percent year-over-year since 2016, hitting $513 million in 2020. Countless fraudsters have impersonated the heads of crypto startups and crypto companies themselves.
So companies in the space have stepped up to use blockchain as a force for good. Winding Tree, an Ethereum-powered travel distribution channel, has come up with an open-source registry that provides real-time identification and verification of companies and their representatives. Known as ORGiD Bot, the solution requires that companies who seek to register have an Ethereum wallet with a small amount of stored Ether (ETH) to sign up. Once a part of the system, they can easily determine whether the entities with whom they are conducting business are legit.
DeFi is on the path towards becoming mainstream, and entrepreneurs need to get in on the action to stay ahead of the curve. It is one of the most important innovations of blockchain technology that is being recognized for its capability to revolutionize global finance. Now is the time for both novice and serial entrepreneurs to explore ways to capitalize on DeFi.
