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Thought leadership | 11/10/2020

Crypto Is Revolutionizing the Financial System Through the DeFi Sector

You have most certainly heard of it! Decentralized finance, commonly referred to as DeFi, is an emerging sector in the blockchain space that is promising to disrupt the financial sector. The term DeFi refers to financial protocols, tools, products and platforms using smart contracts as alternatives to the traditional financial infrastructure. DeFi apps are transparent and accessible to anyone with the required blockchain wallet and access to the internet as there are no credit checks, KYC or any barrier to entry common for traditional banks. In short, DeFi is a brand new monetary system that seems to empower users, by offering an alternative to the old and outdated traditional financial system we all know.

Benefits of DeFi Protocols

There is no central governing body on these apps allowing users to interact in a trustless manner because the underlying smart contracts automatically keep those involved in transactions safe. By adopting blockchain technology, DeFi expands its use from simple value transfer to more complex financial use cases. The introduction of DeFi applications cut out middlemen in financial processes such as loans, crowdfunding, derivatives, and betting.

Most DeFi apps have been built on the Ethereum blockchain, with more than $11 billion locked up in the protocols by more than 100,000 users according to DeFiPulse. This shows clearly how the DeFi sector has exploded in popularity throughout 2019 and 2020. Now, DeFi is one of the major use cases of blockchain technology and that could bring a great increase in maturity of the crypto industry!

DeFi protocols allow you to manage your own digital asset finances without relying on centralized financial institutions such as banks, money markets, insurance, and lending firms. This is critical in bringing financial services to the 1.7 billion unbanked population worldwide. Something the crypto industry has been trying to do ever since its first steps.

DeFi protocols are based on publicly viewable blockchain platforms that offer transparency and openness. Users can audit the code that powers the solution’s smart contracts and the processed transactions. These apps achieve transparency while also dispensing with trusted third parties and costly intermediaries, ensuring access costs are small as possible.DeFi also provides users with ways to easily earn returns from their digital assets. This is by contributing to lending pools used to provide collateral-backed loans to borrowers, and depositing assets to liquidity pools that allow traders to swap their assets on decentralized exchanges. Lending pools and liquidity pools offer you an investment that can provide greater returns than those offered by banks!

DeFi Use Cases

The DeFi field aims to do what cryptocurrencies have done for payments, but for the entire finance industry. DeFi applications aim to replace the existing financial infrastructure of banks, lenders, insurers and more financial institutions. The crypto community is developing DeFi alternatives to almost every financial service, as well as some unique decentralised products and services enabled by the power of peer-to-peer blockchain technology. The most common use cases are open lending protocols, decentralized insurance, yield farming, staking, synthetic asset issuance and automated market makers (AMMs).

For instance, open lending protocols provide a platform where users can lend and borrow digital assets in a secure and trustless manner. Here, lenders deposit money through which they earn a variable return and borrowers deposit a certain amount of funds as collateral, and pay a fixed interest rate on borrowed funds.

DeFi sector has grown by more than 5,000% in the last two years, as the total value of digital assets locked up in the tools and protocols has increased from $203 million to over $11 billion. The number of firms developing their own DeFi applications has increased tremendously and that highlights a huge increase in interest by the market. 

The increased growth of these DeFi solutions shows an interest to provide more services to a wider population, and innovation that could change the financial market. Through these ever increasing applications, financial services will become ubiquitous. Now, there is a real possibility of lowering the number of unbanked and underbanked population once DeFi tools and protocols become more mainstream and replace the centralized financial services providers. Imagine being able to manage your funds and make them grow without having to go further than your smartphone screen!


The content you are reading is for informational purposes only. Nothing contained in this article constitutes a solicitation or recommendation to buy or sell crypto-assets in this or in any other jurisdiction in which such solicitation could be unlawful under the laws of the country.  Before using the services, please educate yourself to make informed decisions. Crypto assets are volatile. Carefully evaluate your goals and the financial risk you are willing to take. Please be aware that Ledger does not provide financial, tax, or legal advice. Decisions to perform operations involving crypto assets should be taken on your own or rely on opinions of reliable and qualified experts.

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