The traditional financial sector comprises many entities tasked with providing financial services to retail and commercial customers. Such entities include banks, real estate firms, insurance, and investment companies. As things stand, the traditional finance sector offers limited access to a significant section of the population. According to the World Bank, around 1.7 billion adults or 31% remain unbanked globally, making it difficult for them to access essential services like savings, credit, and investment products, which leaves them stuck in poverty. But, this narrative is slowly changing thanks to cryptocurrencies and decentralized finance applications.
DeFi Acting As A Bridge
DeFi aims to reconstruct the traditional finance sector to be inclusive for everyone worldwide in an open and permissionless manner. But before this happens, people involved with DeFi have realized they need first to build a bridge between the centralized and decentralized worlds.
Cryptocurrencies came around to offer individuals equal access to financial services without having to go through centralized institutions and their bureaucracy. So far, they have solved many problems when it comes to financial inclusivity and offering people power over their finances since there are no geographical restrictions, transactions are relatively cheap, and disinterested third parties like banks have no way to restrict access.
But they have their own share of problems, including high volatility, which means it is easy to lose your savings, regulation is still trying to catch up, and combat fraudsters. Some of these projects are one-dimensional focused on a single area.
Since decentralizing every aspect of traditional finance isn’t that easy and requires time, creating a bridge that joins DeFi and centralized finance seems like the logical step in this journey. And we are witnessing several projects that are working on this objective through different solutions. So far, some projects are working towards helping users use both crypto and fiat on the same cards, thereby helping them access loans without a credit score or KYC.
Supply Chain Solutions
Other projects like Amplify are working on providing contract credit or asset mortgage credit to companies that have typically been left out of the traditional credit granting system. Based on Ethereum, Amplify is a decentralized supply chain project that is quite promising and aims to grant small businesses opportunities. It serves as a hybrid of both traditional financial markets and blockchain markets through a B2B2C infrastructure that offers the benefits of on-chain protocols such as governance, liquidity, and traceability coupled with those of off-chain stakeholders such as legal and accounting firms and financial institutions, thereby guaranteeing value safety and legitimacy of the on-chain assets.
As a bridge of centralized finance and DeFi, Amplify has several perks, including granting small businesses or suppliers credit by enforcing on-chain governance agreements thanks to many years of experience with supply chain finance and blockchain technology.
The project has an AMPT token used for various functions, including governance allowing its holders to participate in decision making. The token is also used to finance loans on the protocol and to incentivize liquidity; holders are rewarded for depositing their tokens for this purpose. The realized profits from the lending process are redistributed among token holders.
DeFi Inspires Growth Of The Cryptocurrency Market
DeFi is making it possible to decentralize many sectors that make up traditional finance, and it has inspired a new wave of innovation within the cryptocurrency sector. This year DeFi has witnessed the biggest growth and inspired a renewed interest in cryptocurrencies and the blockchain.
Starting the year at just under $700 million in total value locked (TVL), the DeFi sector has experienced a 2100% growth within 12 months, with the TVL currently sitting at around $16 billion. Also, the number of DeFi tokens has grown, with over 1500 tokens in existence today.
The DeFi boom has been good for the entire market, and even the current market bull run owes a lot to the DeFi buzz. Of course, the biggest beneficiaries have been protocols that allow for the development of these applications, such as Ethereum, EOS, and Bitcoin.
Ethereum hosts over 90% of all DeFi projects in existence today. Demand for ETH required as collateral on these projects has seen the second-largest crypto token experience a resurgence in fortunes in 2020. ETH has gained over 400% since the beginning of the year, and you have to go back two years to find the last time the token was trading around the $660 range.
Wrapped Bitcoin (WBTC), the tokenized version of Bitcoin that runs on the Ethereum blockchain, sits second behind only ChainLink on the DeFi charts with a market cap of over $2.6 billion.
Interest in DeFi and projects working towards decentralizing and bridging the gap between centralized finance and traditional markets isn’t slowing down anytime soon if the current state of things is a precursor of what is to come. If anything, let’s expect to see more innovation that makes it easy for everyone to access essential financial services.