Today’s financial climate – strained by the ‘Great Resignation’, outdated central banking policies, artificially restrained interest rates, and other factors – has shaken confidence worldwide in major financial institutions.
As a result, individuals and institutions are looking for new and innovative ways to preserve and generate wealth.
One powerful alternative is decentralised finance, or DeFi – an umbrella term for financial services powered by blockchain infrastructure. With DeFi, consumers can do most of the things that banks support – earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more – albeit in a smoother way as it does not require paperwork or a third party.
DeFi has been gaining traction, fueled by the fact that it reduces human error through smart contracts, provides access to markets from anywhere at any time with an internet connection, and cuts out intermediaries. In essence, DeFi turns money into a programmable and interoperable protocol, akin to what earlier versions of the web did to digitise information and content.
While DeFi is a relatively recent trend, the amount of value locked up in DeFi protocols has grown to more than $200 billion, with trading volumes reaching almost $100 billion per month. The DeFi ecosystem itself is rapidly expanding both in terms of diversification from Ethereum to multiple blockchain infrastructures (e.g. NEAR, Solana, Polkadot, and Avalanche) as well as the emergence of new layers that replicate the features of centralised finance (lending, payments, and marketplaces) or support brand new use cases.
The venture world is actively embracing DeFi, as the past months have seen an uptick in DeFi unicorns – such as Anchorage (asset custody and governance), Fireblocks (embeddable APIs for token storage and digital asset operations), and Lukka (back-office platform for DeFi auditing).
Established fintechs and insurtechs are already beginning to harness DeFi and bring its functionality into their consumer-facing brands. Fintechs have been key drivers in the development of banking alternatives, offering customers new ways to pay and manage their money. Insurtechs have done the same by leveraging technology to provide better customer experiences. DeFi is the next logical step, especially because fintechs and insurtechs can seamlessly weave DeFi functionality into their existing user interfaces, making it more approachable and consumer friendly.
At the same time as fintechs and insurtechs are encroaching on DeFi platforms by incorporating decentralised functionality into their apps, new DeFi entrants are trying to dislodge neobanks and challenger insurers with differentiated products that leverage the blockchain.
For instance, several projects, including Juno, Dharma, Linen, and Outlet, are launching DeFi neobanks.
