Decentralized Finance Is Due to Take off This Year

The crypto winter is passing. Although cynics continue to moan and groan about the instability of all things blockchain-related, sensible investors know that this is patently wrong.

In fact, there are some exciting new trends building this year, and the savvy among us should take note as some of these things will have a major impact on our everyday lives. Btcnews, for example, regularly reports on updates in the crypto and blockchain worlds.

One of the things that is already taking off this year is decentralized finance. Let’s take a closer look at what this entails and how it could be beneficial for you.

Why is decentralized finance important?

Decentralized finance, or DeFi as it’s come to be known, is a way of conducting financial operations that circumvents the use of traditional banks. Rather than paying banks fees to carry out transactions, DeFi works through smart contracts and involves the use of digital wallets for holding money. They function outside the realm of centralized governments and regulatory systems. 

Like cryptocurrency, DeFi works on Decentralized Ledger Technologies (DLTs), establishing peer-to-peer (P2P) networks between users.

This decentralized technology is hugely advantageous for many classes of people. In many countries, large numbers of people do not qualify for participation in traditional banking practices. DeFi creates the possibility for keeping money and exchanging it without having to meet any particular bank’s criteria.

Crypto bridges

When cryptocurrencies first started emerging, one of the questions on people’s minds was whether they would ever be exchangeable with one another. One of the predictions for 2023 is the growth of “crypto bridges,” which will allow for exactly this. 

What has enabled the emergence of crypto bridges is the development of cross chain technology. Two types of bridges are being developed: trusted bridges and trustless bridges. Trusted bridges are ones that allow for coins or tokens to be transferred from one blockchain to another. Trustless bridges are ones that take place through the use of smart contracts and trading algorithms.

There is still some concern about the use of crypto bridges, says TechTarget. With trusted bridges, the transfer process essentially involves the use of a third party, the absence of which is one of the reasons that crypto is considered secure in the first place. So there is some concern about the potential for fraud. With the use of smart contracts, there is some degree of vulnerability to hacking unless the codes used are precisely correct. Nonetheless, proponents still believe that crypto bridges will see huge growth in the near future, and that issues will largely work themselves out.

Cross-border payments 

One of the great hopes for crypto when it first emerged was that it would solve the issue of cross-border payments by eliminating the need for currency conversion and getting around national and international regulatory obstacles.

During the early years of digital payment making, cross-border payments required a great deal of customization and were therefore both time consuming for the participating parties, and slow. But procedures are getting more and more streamlined, and regulations are changing to allow for more payments to be made between countries in 10 seconds or less.

The streamlining of cross-border payments will be a Godsend to many people unable to make international payments, and will also make life easier for those who can but who don’t want to deal with the cumbersome procedures involved. It will be hard to stop progress in this area once it gets established.

Buy now, pay later

As the name suggests, the phenomenon known as “buy now, pay later” (BNPL) is a credit mechanism of sorts, says Refinery29. In it, customers are able to pay for products or services in installments as they would using credit cards. Buyers simply need to make an initial down payment – often 25% of the total value of a given purchase – and the rest can be paid for in small installments.

Because many people do not qualify for credit card ownership, the BNPL scheme opens up this possibility to a much larger portion of the population. These payments are made interest-free, which sets BNPL apart from credit cards.

Although the idea is not new, it is set to grow substantially this year as regulations in many places change to allow for its usage. BNPL will make a big difference in the lives of many people who either cannot currently afford to make large purchases, or who want to avoid dealing with potentially large interest payments.

“Sunbit,” “Sezzle,” and “Scalapay” are a few of the names leading the BNPL market.

Keep your eyes peeled

These are just a few of the DeFi trends taking place this year. DeFi is something that affects all of us, not just industry junkies. So it’s a good idea to keep your eyes peeled and keep an open mind about how you can potentially benefit from some of these things. Many people have no idea how useful some of these ideas are until they happen to come across them. And the more people get involved, the more the DeFi world will become established, universally accepted, and grow in yet more directions.

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