Decentralized Finance or DeFi can be a confusing phenomenon for the uninitiated. Is it linked to cryptocurrencies or NFTs? Is it fintech? Or does the term cover financial companies who apply blockchain in their organization? DeFi is an umbrella term that refers to traditional financial services and products built on and replicated by an unregulated - decentralized - blockchain infrastructure. Decentralized Finance uses cryptocurrencies to function but want to exclude financial companies or governments. In a way, it resembles a crowdsourcing effort – the number of DeFi users worldwide is estimated to be a few million people - where having an internet connection is all you need access financial services. It is an emerging market with a market share in the total crypto market of only a few percent. What is DeFi used for, though, and is it set to change in the future given developments in the direction of Web3?
Decentralized Finance has a large focus on specific services
DeFi covers various types of day-to-day financial services like lending, payments, trade speculation, and many more. In 2022, however, the DeFi market size was not distributed evenly. Some of the most popular activities on DeFi were money exchange and crypto lending. Their TVL (Total Value Locked, how much money people put into that service) was billions of U.S. dollars higher than others. Some of the most used cryptocurrency exchanges come from DeFi, whereas crypto lending became more popular due to the interest rates on offer on certain DeFi platforms. The market size of decentralized payments and insurance, for example, are much smaller in comparison – probably due to the lack of a practical application for many consumers. Some believe this may change as the metaverse develops and real-world items get involved.
Web3 and asset tokenization: potential applications for DeFi and NFTs
Web3 is another word with close ties to cryptocurrencies and refers to a decentralized version of the internet that solely runs on blockchain. A stand-out application of Web3 is the metaverse, an environment like our own where your digital character can walk around and interact with virtual objects. For example, one can buy a deed to a digital plot of land, where you can build a virtual home. The sales of such virtual plots grew significantly after Facebook’s rebrand into Meta. Such items do not have to be digital only. There has been interest, for example, in virtual sneakers, sold as an NFT in a DeFi exchange but also have a physical counterpart. This is called “asset tokenization”, or real-world items becoming a digital token. Decentralized Finance potentially feeds into this, as it could provide the services necessary for trading or legal recognition.
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Raynor de Best
Content expert covering payments and (crypto)currencies