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Yield farming is a fad, but DeFi promises to change the way we handle money

With the COVID-19 outbreak hurtling the US and overseas economies, investors are facing a second economic downturn in just over a decade. While the 2008 financial crisis and the coronavirus pandemic are very different, both events have caused market volatility and enabled new technologies to emerge.

The economic disruption caused by the pandemic also shows the importance of serving people who are currently outside the financial system, both in developing and developed countries. According to the World Bank, there are now 1.7 billion people worldwide without a bank account.

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Yield farming is a fad, but DeFi promises to change the way we handle money
Yield farming is a fad, but DeFi promises to change the way we handle money

Since the financial crisis, people have begun to question established companies and traditional systems like banks. With more than half the world’s population under 30 and 55% of the world’s 7.7 billion citizens now online, finding alternative solutions to existing financial structures has become far more than a niche. Twelve years after the 2008 financial crisis, people still seem to distrust banks. According to a survey of households by the Federal Deposit Insurance Corporation, in addition to high fees and minimal balances, non-banks have pointed to a lack of trust and privacy when dealing with banks as reasons for not having a checking account. In combination, a lack of trust (16.1%) and a lack of privacy (7.1%) make up almost a quarter (23.2%) of the main reasons why people without a bank account do not have a bill.

The lack of trust in banks has created a demand for alternative financial services, which has led to an increasing number of alternatives for people to put their money into. Technology companies were a popular choice. This idea really took off after the launch of the iPhone in 2007 and its App Store the following year. In addition to opening up opportunities for products and services, Apple created a new way to distribute software quickly while keeping the world connected via the Internet.

Several innovative companies have emerged from innovation crises. Instagram, WhatsApp, Uber, Airbnb, Twilio, Dropbox and Slack are just a few of the successful startups that were created during the last recession. In the years that followed, not only were multi-million dollar brands built, but fintech startups like Kabbage, LearnVest, and Betterment emerged in Silicon Valley and made great strides in digitizing banking. These fintech apps have not only eliminated some of the middlemen, but also dramatically changed the way people deal with money on a daily basis.

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Financial exclusion

Times of uncertainty open the way to a better world as people seek more reliable alternatives to the financial institutions that have failed. Just as the 2008 recession pushed successful businesses out of the wreckage, the 2020 COVID-19 pandemic does the same. Today we are seeing an increase in the unemployment rate due to COVID-19. This fall, the US Labor Statistics Bureau reported that long-term unemployment, or those who have been unemployed for 27 weeks or more, rose to more than 2 million – the highest level in the recession caused by the recession. the coronavirus pandemic. Although some people have returned to work, the data show a significant increase in unemployment rates over the past seven months.

Consumers and businesses are turning to banks and credit unions for financial assistance, access to government assistance, and guidance on how to deal with the ongoing economic storm. Institutions are failing, however, and unfortunately the systems that protect us, such as healthcare, testing, protective equipment, and supply chains, have collapsed due to poor governance and delayed responses. As in 2008, consumers are turning to technology for solutions.

An opportunity for DeFi

This represents a tremendous opportunity for today’s cutting edge technology, especially for decentralized finance or DeFi, as the majority of the population can get access to financial services. As part of the hot new crypto trend of 2020, DeFi is reducing intermediaries such as banks, thereby accelerating the speed of transactions. According to industry website Defi Pulse, the total value locked on DeFi platforms has increased by around $ 12 billion in one year. At a time when central banks are cutting interest rates with a benchmark interest rate close to zero, investors in search of new yields are now ready to explore DeFi.

Over the years, raising finance has been a challenge for fintech companies, especially start-ups, as investors tend to focus on startups with clear business models. However, the economic slowdown has significantly changed the way Bitcoin (BTC), DeFi, stablecoins, data protection and much more are represented. The value set for DeFi projects continues to rise, but a less-discussed milestone is that the industry has exceeded $ 500 million in venture capital funding.

According to CB Insights fintech data in Q3 2020, 60% of total capital raised by fintech startups came from just 25 rounds of investments worth $ 100 million or more. In addition to the growth trend in venture capital funds, the report found that fintech investments in rounds of $ 100 million increased 24% compared to the second quarter, while investments in smaller business premises increased by 16% over the same period. Usually, Fintech’s business volume declined 24% compared to Q3 2019 and totaled 451 global companies. However, the US dollars invested in fintech startups rose again to 36.5 billion US dollars in the third quarter of 2020. This was the highest result so far in 2020 and the second best quarterly result since the end of the year. In particular, the number of smaller business investment rounds – labeled as “seeds” or “angels” – increased 20% compared to Q2 2020.

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With all eyes on DeFi, it’s time to understand that it’s less about the insane returns that Yield Farming attendees can get and more about democratizing finance. In the early years of the industry, DeFi projects were already eliminating inefficiencies in the current system by increasing financial inclusion, increasing liquidity and reducing costs. Since the beginning of the third quarter of 2020, “payments from cryptocurrency enthusiasts to DeFi projects have increased from $ 2 billion to over $ 10 billion.”

Beyond the funding, there is growing interest in DeFi and its potential to improve current systems and infrastructure. It is no longer acceptable for industry players to promote an “amazing tool for inclusion” without working on the usability front. Despite the incredible promises in the industry, user complexity remains a major barrier to mass adoption.

The views, thoughts, and opinions expressed herein are those of the author only and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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