The global economy is going through a series of hiccups. Many of these could threaten worldwide recovery in the months or years to come.
Post-crisis economic conditions are mixed.
Labour markets are strong, but inflation is soaring. Crude oil and natural gas prices are surging, while financial markets (stocks, bonds, and cryptocurrencies) are fading fast.
War in Eastern Europe and a global supply chain crisis are absorbing the international marketplace.
Does the global economy require a shakeup? Is there something that could be employed to improve conditions? What about finance, commerce, and trade?
Well, meet decentralized finance, also known as DeFi.
What Is the Impact of Decentralized Finance on the Global Economy?
DeFi is a growing financial system – open and international–constructed and installed for the digital age.
The industry provides financial instruments without depending on middlemen, like banks, brokerages, and exchanges. Instead, DeFi depends on smart contracts within the blockchain, a system of secure and distributed ledgers akin to what cryptocurrencies (Bitcoin and Ethereum) utilize.
But while it might be easy to dismiss it as nothing more than an esoteric alternative for crypto enthusiasts, there are plenty of real-world applications that could impact the global economy in a meaningful way.
At the same time, this does not mean that the conventional financial apparatuses will be dismantled.
“DeFi presents traditional financial institutions with a series of opportunities for growth that can enhance existing operations and services – but also threatens today’s financial services and their core business model,” EY stated in a report.“How institutions respond to this new form of decentralized financial intermediation will have lasting impacts on their role in the emerging digital economy.”
So, what are some real-life examples of DeFi playing a role in the global economy?
1. Smaller Lenders
Over the last decade, there has been immense growth in the number of alternatives to traditional lending sources.
Whether P2P lending or digital asset exchanges, borrowers no longer need to rely on the Big Banks for these types of products.
Today, smaller outfits can participate in lending, thanks to DeFi.
Smart contracts can manage deposits, pay interest, and lend capital based on predefined terms and provisions determined by the marketplace.
Let’s be honest: There’s a token for everything and everyone.
There are nearly 20,000 virtual tokens to choose from, from BurgerSwap to SushiSwap.
But while these meme coins are nothing more than jokes, many tokens possess a utility. Indeed, the tokenization of financial or physical assets can spawn a more accurate, efficient, and transparent economy.
Many industries are already embracing DeFi and tokens, particularly in supply chains and finance.
3. Skip the Intermediary
One of the most significant advantages to DeFi is that there is no intermediary or middleman.
Instead of the multiple parties and processes of conventional banks and payment service providers, you can exchange digital assets (Bitcoin for Ethereum) through automated smart contract protocols.
This is extremely important because you can save money on transactions. While the cryptocurrency industry needs to get better in this arena, as well as speed, improvements are being made every day.
4. Pricing Signals
Prices are the lifeblood of a free-market economy. They send signals to every active participant in the global economy.
DeFi supports this endeavour.
The prediction market is growing in the DeFi realm, whereby users can vote on a blockchain-based prediction market. They then exchange value on events and their outcomes.
This can be applied to sports, elections, economic events, geopolitical turmoil, and other day-to-day real-life instances.
5. Data Analytics
Big Data is the innovation that everyone in the private sector embraces.
Businesses can extract a toothpick from a mountain of information.
DeFi can enhance data analytics in many ways, particularly with blockchain tools and unique dashboards.
Today, organizations can uncover an enormous treasure trove of data to facilitate better decision-making, such as risk management, company manoeuvres, and new financial opportunities. This offers exceptional competitive advantages in the market economy.
Too Big to Fail?
In the end, many financial experts purport that the DeFi industry needs to erect some type of regulatory framework. Without regulators acclimating to the speed and innovation of DeFi in time, the sector could become too big to fail, they warn.
“If regulators wait too long, in effect, cryptocurrencies and DeFi applications can become too-big-to-regulate,” the Brookings Institution noted in a recent paper.
Of course, it is challenging for the banking system to adapt because it is one of the most regulated industries in the world, making it hard to adapt to these new developments and adopt technologies.
DeFi, like cryptocurrencies, is here to stay, and its positive impacts on the global economy will be felt for years to come.