Think of all the technologies that are trying to disrupt the status quo. UPI wanted to change how people transact. So did crypto. So does a phenomenon you may have heard of: DeFi (decentralized finance).
According to Edul Patel, CEO & Co-Founder – Mudrex, “Cryptocurrency is used as a medium of exchange or a store of value. DeFi (Decentralized Finance) recreates traditional systems like lending, borrowing, investing and trading without intermediaries. So, on DeFi, crypto is the medium of exchange to perform financial activities. Both of them are built on Blockchain enhancing transparency, reducing costs and providing greater accessibility to financial services”.
With all that’s going on in the world, has the time come for banks or brokers to become obsolete? Because that might be the premise of DeFi. That already sounds too futuristic: a world where lending, borrowing interest, trading assets and earning interest can happen without stepping foot in a bank or dealing with cumbersome paperwork. How is that happening? It’s something called “smart contracts”, where tasks would be automatically executed when certain conditions are met. The apps that use these smart contracts and run on Blockchain are called dApps (decentralized apps).
What are the pain points or problems that DeFi could help entrepreneurs with?
“DeFi can change how people start businesses in big ways. First, it helps more people get money through online lending without dealing with banks. Second, DeFi makes transactions cheaper and quicker, making businesses run smoother. Third, it uses smart contracts that can’t be changed, making deals safer and more trustworthy. Lastly, DeFi lets businesses work across borders easily, opening up new markets worldwide. Overall, DeFi isn’t just about money. It’s about making business fairer, faster and more open to everyone”, states Patel.
Even then, what could be the use cases or infrastructure of DeFi that might be appealing to entrepreneurs? Even if entrepreneurs come across decentralized apps, how is it different from the status quo?
Patel remarks, “Unlike traditional systems that involve middlepersons and higher costs, DeFi uses smart contracts to automate transactions. Traditional banking takes a lot of time either in lending or borrowing, however, it is quite easy and simple on DeFi. It cuts out middlepersons, making it cheaper using decentralized apps (dApps) than traditional banking. These apps let anyone with Internet access and participate. This shift towards DeFi creates a financial system that includes more people, breakingdown barriers and fostering innovation in finance”.
Though, maybe, India has, already, seen a couple of crypto ventures. Are there any unique opportunities that a DeFi platform could offer entrepreneurs?
“With a large population that’s tech-savvy in India and more people getting online, the country is ripe for decentralized finance. DeFi can make financial services more accessible for entrepreneurs in new ways. India’s strong community of developers can create innovative DeFi technologies, boosting use locally and globally. Using Blockchain, DeFi can, also, help include people who don’t have bank accounts or have limited access to banking. India’s DeFi has a huge potential to change finance for the better”, opines Patel.
So, assuming there’s a world where DeFi gains significant traction, what would CeFi (Centralized Finance) look like?
Patel comments, “As DeFi grows in popularity, traditional finance needs to evolve to keep up. We’ll probably see CeFi platforms start using DeFi tools, creating mixes that blend the safety and rules of centralized systems with the new ideas and quickness of decentralized finance. This teamwork could make things clearer, less expensive and give customers more types of financial services. Also, CeFi might start using Blockchain for better security and clearness. If they welcome these changes, CeFi could connect old finance and the new decentralized world, building trust and reaching more people”.
Of course, everything sounds hunky-dory in theory. But, what happens when the rubber hits the road? What are those challenges or troubles that entrepreneurs might face when integrating DeFi solutions into their business models?
Patel observes, “Incorporating DeFi solutions into business models without awareness could be challenging for entrepreneurs. Regulations around the world are still unclear, making it hard to follow them all. Some of the risks could be issues with smart contracts, scalability and volatility. To succeed, businesses need to handle these challenges carefully, managing risks well and finding new ways to use DeFi safely”.
Though, how decentralized are decentralized projects? Are there any elements of control and influence or centralized services or development teams that might hinder DeFi projects from being truly decentralized?
Patel asserts, “I acknowledge that DeFi projects vary in decentralization. While many aim for full autonomy, centralized elements like development teams and services can pose challenges. Dependencies on centralized or influential figures may impact decision-making or network dynamics, deviating from decentralization ideals. To achieve true decentralization, rigorous governance models, community empowerment and open-source practices are crucial. Striking this balance ensures resilience against external influence and fosters trust within the decentralized finance ecosystem, essential for its sustainable growth and adoption”.
And how should VCs look at the whole DeFi movement? How could they differentiate between a promising and lucrative DeFi entity versus a DeFi entity that’s speculative or overhyped?
“Investors need to carefully check out which projects are solid and which are not. Look closely at the tech they’re using, the skills of the team and how much the project can grow. See if it solves a real problem and if its smart contracts are strong. How the project is managed and how involved the community is, also, matters a lot for its future. Projects that are open about what they’re doing and have clear plans tend to last longer. By focusing on these things, investors can lower risks and find DeFi projects that really stand out”, affirms Patel.
What about from a regulatory perspective? Are there elements that could complicate matters when considering DeFi platforms?
Patel proclaims, “Government agencies are closely watching decentralized finance due to worries about protecting investors, preventing money laundering and ensuring financial stability. It’s important for businesses to work closely with regulators, set up strong compliance rules and stay informed about changes in the law. Doing so can help manage risks and build trust in DeFi over the long run”.
And there’s a sense that we’re in the golden age of AI. Are there some interesting ways this would be integrated into the DeFi x crypto ecosystem? And what could be some unexplored use cases where AI could augment the functionality or security of DeFi platforms?
“AI can help keep things safe by spotting fraud and weird stuff right away, making the whole system safer for everyone. It also makes trading smarter by predicting what might happen next and automating things using clever trading strategies”, quips Patel.
