How Decentralized Finance (DeFi) will impact the global economy?

In addition to Bitcoin, the decentralized finance (DeFi) sector has seen significant growth over the past year. The crypto collateral locked in the DeFi economy has increased from $275 million in early 2019 to $14 billion today.

There are both benefits and downsides with the majority of DeFi applications currently running on the Ethereum blockchain. On one hand, this has negatively impacted the cost and speed of Ethereum transactions.

However, these problems have also stimulated a flurry of creative development regarding “layer 2” efficiency-oriented tools. As well as establish alternative faster, cheaper and more scalable blockchains.

For Decentralized Finance (DeFi) to continue thriving, one of the keys will be integrating advanced decentralized AI. Only a few DeFi projects have leveraged AI, but that number is expected to rise in 2021.

The first substantial DeFi project, MakerDAO, enables decentralized borrowing and lending of major cryptocurrencies. It currently holds 2% of all Ether inside its smart contracts and has issued over $77 million in debt.

Compound Finance is another DeFi project gaining traction. The core mechanism behind it is “yield farming”. Which incentivizes token-holders for staking their tokens. In a way that allows tokens to be lent out via rewarding them with a special yield token.

An additional underrated aspect of modern DeFi is its “noncustodial” nature. Noncustodial smart contracts eliminate the intermediary from complex multiparty transactions. Using code that temporarily locks certain tokens until certain conditions are met.

These contracts often rely on decentralized, noncustodial crypto exchanges like UniSwap. Which are relatively new but steadily grabbing market share from centralized exchanges such as Binance.

Can DeFi Reach Unprecedented Levels?

For the DeFi sector to reach unprecedented levels will depend on being able to extend beyond Bitcoin and Ethereum to other lower-level altcoins. Most of the altcoins currently being traded on crypto exchanges are utility tokens serving functions within innovative blockchain technology projects.

The market for these altcoins lacks the liquidity and sophistication of the markets for the top cryptocurrencies. DeFi on lower-liquidity altcoins would increase the financing options for the associated technology projects.

A healthier altcoin ecosystem would make the decentralized space more attractive to early stage tech entrepreneurs. Potentially shifting the global tech world away from centralized control.