Cryptocurrency seems to be a fad to people who are not tech-savvy and are opposed to new developments until proven. Everyone seems to talk about it, and few seem to know what it means. On the one hand, there is Bitcoin, the original cryptocurrency that has gained a lot of attention and traction. Its value currently surpasses $1 trillion, forcing traditional financial institutions and banks to take notice. On the other hand, there seems to be a new thing every day in the crypto space.
Smart contracts and Decentralized Finance (DeFi) are still in their early stages and years behind being accepted by the general populous compared to Bitcoin. Yet, DeFi crypto has the potential to become even more valuable than Bitcoin, given its many use cases and its potential to transform, digitize and democratize global finance. So, what does this mean, and why should you care even if you have no intention of owning cryptocurrency?
DeFi could change the future of finance.
DeFi coins matter because they could transform financial services for good. Consider how you buy financial products today: you go to a lender and abide by their rates and rules to get what you need. The lender controls most of the process – you have to trust their policies. Because of inflation, monopoly, and corruption, you could be exploited by the lender. DeFi allows financial services to run in a transparent, borderless, open-sourced, and widely accessible form. The set of rules you have to work under is clear from the get-go.
Such an open system has the potential to overhaul how financial institutions conduct business. Imagine a world before Wikipedia. Then, you had to go to the library or buy a huge dictionary to research. Research tools were expensive, inaccessible, and quickly outdated. After Wikipedia, over three billion people research every month. They get free, detailed, and real-time information, better than they would in a library. If false information is put up, the community reviews it fast and corrects it. DeFi could be the Wikipedia of financial services.
The TVL metric
For DeFi, the most popular metric is the Total Value Locked (TVL). DeFi locked TVL represents the total assets locked in different DeFi app smart contracts. ‘Locked’ in this case does not mean that the assets are inaccessible for a specific time but that they are secured. The metric helps to identify how much capital is in use throughout the whole ecosystem.
When the metric was popularized, DeFi was still obscure. The locked assets were less than $400M, and most were in one app – MakerDAO. Right now, there are over $10.4B TVL in the Ethereum DeFi ecosystem. With them, has grown the number of dAPPs and launched different dAPPs protocols. TVL now powers DeFi indexes, and the value is spread through more than 40 applications.
The backbone of DeFi is a stable coin that gives users the benefits of a cryptocurrency minus its volatility. You can redeem stable coins for an asset at any point. There is still plenty to do to improve the DeFi ecosystem in terms of regulation, but it should not surprise you if, in a few years to come, DeFi is a colloquial term.