a future where DeFi and CBDCs can work together

the decentralized financing (DeFi) They are changing the way people around the world think about money faster than any previous financial revolution. Banks that have monopolized access to money since ancient times are finally seeing their status in question. Now it is DeFi that is beginning to offer an alternative that could reverse the economic landscape and democratize access to finance.

This seismic power shift away from governments and banks to real people should have happened a long time ago. especially in developing countries, where DeFi has already established itself as an instrument for transfers and small loans. Financial inclusion is another significant benefit DeFi technology can bring, especially when 1.7 billion adults do not have a bank account.

The growth of the DeFi space is staggering. DeFi adopts concepts from traditional finance and transforms them into transparent protocols through intelligent contracts. DeFi offers a trustworthy ecosystem that offers everything from insurance to loans to savings accounts. The appeal of DeFi is evident as the total value of the assets held in DeFi financial products is nearly over $ 175 billion.

a future where DeFi and CBDCs can work together
a future where DeFi and CBDCs can work together

However, with DeFi on the rise and governments and banks not wanting to lose control of the monetary system, they are turning their attention to digital currency issuance itself. Central bank digital currencies (CBDCs) are seen as a way to keep control of the monetary system while offering users faster, cheaper transactions. What elements of decentralization can we expect in our daily life by 2030?

DeFi in the future

Imagine the year 2030. Célia, a young Parisian, pulls out her cell phone to buy a Eurostar ticket from Paris to London. When you get to the checkout screen, choose your primary digital wallet. Célia turns to her wallet and sees that her digital euro balance has gone down. No one can save money today as loans can be borrowed and repaid within a person’s portfolio based on the value of their assets and repaid automatically over time.

While DeFi will play an important role in 2030, CBDCs will also play an important role, which have become the standard tool for banks around the world. China leads the way based on the success of its previous tests. However, they tend to be more state scrutiny, scrutiny, and censorship. As a result, DeFi has become the first choice for those who value freedom in managing their finances and is now powering the global financial system. And thanks to DeFi’s leadership, we have moved on from bank accounts that allow us to access and use our money anytime, anywhere, and apply for loans when we need it.

Cryptocurrency’s goal of making money universally available around the world means that DeFi’s underlying protocols will provide liquidity for exchanges, credit, and borrowing. And despite the complexity of DeFi, end users are not aware that they are interacting directly with these global sources of liquidity, as all DeFi and spending are guaranteed to have total privacy.

In addition, we make all international payments on second-layer zero-knowledge proof of rolls (zk rollups), a scaling solution that bundles hundreds of off-chain transactions in an Ethereum smart contract, thus helping to reduce the congestion to reduce the blockchain. A cryptographic credential, known as a SNARK, is created that guarantees the validity and is published on layer one. By offering free and open alternatives to government money, Bitcoin (BTC), Ether (ETH), and permisseless stablecoins are instantly issued and exchanged for any major government currency.

Defeat DeFi challenges

As DeFi says, this is certainly a plausible future for them. However, in order for DeFi to achieve what many might consider a utopian future, a number of hurdles must first be overcome.

One of the things to consider are the barriers that prevent widespread adoption. For example, the vulnerability of smart contracts, the unpredictability of the DeFi market, regulatory issues and the accessibility of new technologies.

Others focus on the space being too complex for the average trader or investor. And blockchain inefficiency is an issue that needs to be addressed, especially in terms of power consumption and transaction costs in blockchain layer 1 protocols. While alternatives have previously compromised security, technological solutions are emerging at an early stage. For example, ZK-secure cryptography or layer 2 solutions that enable more transactions to be carried out in the room and thus reduce costs.

Of course, you can’t mention some of DeFi’s challenges without talking about the naysayers. For example, Dan Berkovitz, Commissioner of the US Commodity Futures Trading Commission (CFTC), DeFi considers it a “bad idea”. And Tom Mutton, Fintech Director of the Bank of England, had said that any CBDC was “ten times more efficient per transaction” than Bitcoin. However, one has to ask oneself whether one realizes that zk rollups are already 1,000 times more efficient than Bitcoin.

What is DeFi doing to overcome these obstacles?

More education is needed. The DeFi Education Fund is an example of an organization trying to educate policy makers about the benefits of the DeFi ecosystem and help create a regulatory framework for it. To raise awareness of DeFi, it funds applicants who, among other things, work on DeFi research and advocacy in DeFi legal research and practice. With greater knowledge of DeFi, mass adoption becomes easier as new users are on board.

Another way to increase the number of users is to improve the user experience. This has already been observed with second-tier protocols that build portfolios and infrastructures that support DeFi. This way, they avoid frictions and costs, and give users better ways to recover lost keys while making space less complex.

In the long run, however, regulatory clarity is something that gives trust to traditional investment services providers such as banks and institutions while creating a way to allow users to access DeFi on their terms within existing applications. The best part is that many customers don’t even know they are interacting with a blockchain behind the scenes as all complex wallet interactions remain hidden. It is this collaboration between traditional and decentralized finance that could give DeFi the boost it needs to move further into the mainstream.

Trade now

DeFi will remain clear and could become the financial center in 2030. But more needs to be done today.

Right now, eThe increasing development of CBDCs poses both a threat and an opportunity for DeFi as more countries experiment with them and governments begin to adopt them. But just because CBDCs are gaining ground doesn’t mean DeFi can’t find its place in our future world as well.

However, if people want to control their own money and know where it’s coming from, while also giving developing countries access to banking, then DeFi is the way forward for the future. Basic elements of the DeFi infrastructure such as decentralized exchanges (DEX), credit and credit logs, exchange aggregators that automatically find the best prices, and cross-chain bridges will also be needed for CBDCs in the future if these government currencies want to be able to interact with each other and as Money used to be fully digital.

As such, DeFi plays a role as an innovation laboratory that makes it possible to test various aspects of the infrastructure at a rapid pace and ensure that the right infrastructure that CBDCs need is already available when deployed around the world. CBDCs that are adapting to take advantage of the rapid innovation in public blockchains and DeFi will benefit from the connection to massive pools of liquidity that allow users, for example, to instantly trade between the digital euro and Ethereum or to take advantage of the DeFi infrastructure, to get a performance of the digital pound.

It is CBDCs deliberately segregated from DeFi that are set to lose to private stablecoins, one of the fastest growing areas in the crypto industry. But you don’t have to rush for this to be a contemporary reality. There are many hurdles DeFi must overcome before we see the type of mass adoption making its way into everyday life.

In 2030, our Paris friend Célia may not know or care how much of her transactions are CBDC and DeFi, and she shouldn’t care. There is still a lot to be done to make that happen. We hope that by 2030, Célia will be just one of hundreds of millions of people enjoying the glittering highlands of a decentralized financial world that will forever change the way we view money.

This article does not provide investment advice or recommendations. Every step of investing and trading involves risk, readers should do their own research when making a decision.

The views, thoughts, and opinions expressed herein belong solely to the author and do not necessarily reflect the views and opinions of Cointelegraph.

Will accommodate is Co-Founder and CEO of DeversiFi, a Layer 2 DeFi trading platform based on StarkWare’s scalable technology. Will has worked on technology consulting projects, first at Cambridge Consultants and then at IBM, before moving full-time into the public blockchain space and joining Bitfinex in 2017. There he led several projects before combining his experience with his passion for Ethereum’s license-free innovation ecosystem to outsource Ethfinex. Will is a member of the Melon Technical Council, one of the first major governance experiments for a blockchain-based protocol. He also holds a Masters of Engineering from the University of Cambridge.

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