Decentralized Finance (DeFi) Size, TAM, SAM, Competitive Analysis, Emerging Trends & Investment Opportunity

DeFi is an acronym that stands for decentralized finance. It’s a new area that allows users to bypass the intermediary and conduct financial transactions directly with others—and it’s swiftly gaining traction as a viable alternative to established financial services. DeFi already allows you to accomplish the majority of what traditional banks and centralized financial institutions offer, with new products and transactions being added daily.

The DeFi ecosystem is growing rapidly. The global adoption of blockchains and other digital technologies has enabled a wave of new financial services that are decentralized, frictionless, and trustless.

These emerging services leverage software to directly connect lenders and borrowers, unlocking new pools of capital for lending and locking liquidity for investors without intermediaries.

This post is part of an ongoing series on the decentralization of global markets. It covers DeFi as well as other concepts such as supply chain finance (SCF), collateral management solutions (CMS), decentralized trade financing (DTX), shared accountancy and KYC services, virtual entities like trusts, and more.

So, let’s look at how DeFi differs from traditional forms of finance, how it links to the blockchain, and its numerous applications, which range from currency exchange to lending digital assets.

Decentralized financial services on blockchains, as opposed to “centralized” financial services offered by banks or other traditional financial institutions, are referred to as DeFi. It enables participants to utilize cryptocurrencies to do most of the activities that traditional banks provide using government-issued fiat currencies, including lending, borrowing, earning interest, trading assets, purchasing insurance, and so on. DeFi services are often quicker, less expensive, and easier to use, with new benefits and services being introduced daily.

Decentralized finance allows people to conduct transactions directly with other people rather than via centralized entities such as banks. This eliminates the intermediary, making financial transactions faster, cheaper, and more efficient.

DeFi allows you to access your assets via secure digital wallets and conduct transactions using smart contracts. This offers you access to a variety of financial services, ranging from peer-to-peer lending to trading on decentralized exchanges. Anyone with an internet connection may use DeFi, making finance significantly more accessible.

Decentralized finance vs. centralized finance

Centralized finance is the world’s default financial environment, with payments, loans, and trading activities flowing via third parties and middlemen who are extensively controlled by local regulators. Decentralized finance, on the other hand, provides a slew of benefits by allowing users to trade through financial apps over a blockchain network, bypassing intermediaries such as traditional banking organizations.

The elimination of middlemen automatically reduces costs and speeds up processes, but DeFi also makes financial services more accessible. In the realm of centralized finance, not everyone is permitted to create a bank account or obtain specified financial services. As a result, DeFi has the potential to financially empower billions of individuals worldwide who presently lack access to banking services.

DeFi also provides the advantage of offering greater freedom, such as not limiting trading hours as centralized finance does.

How does Decentralized finance (DeFi) work?

DeFi uses smart contracts, which eliminate the need for traditional financial institutions to act as guarantors for transactions; instead, participants in the decentralized finance ecosystem interact directly with one another, and transactions are safeguarded using blockchain technology. Most DeFi solutions do not hold your money, providing you total control over your assets.

DeFi allows you to access your cash or assets using a secure digital wallet. When you wish to transact, you may do it using smart contracts, which means you and the other party agree to a set of terms. For example, a smart contract may be formed to pay cash to a certain account regularly, and this will continue as long as sufficient funds are available. Because a smart contract cannot be modified after it has been made, funds cannot be re-routed and delivered to a new account.

The majority of DeFi apps are created on the Ethereum blockchain platform, however other platforms including Cardano, Binance, and Solana are rapidly creating comparable applications. DeFi is still in its infancy in comparison to centralized financial systems, therefore new applications are constantly being launched.

DeFi applications on Ethereum

Ethereum is a suitable match for DeFi since it is a blockchain platform that supports decentralized apps (dApps) and smart contracts. The Ethereum blockchain stores transaction histories and account statuses, while Ether and other cryptocurrencies are utilized as assets. Smart contracts are then employed by decentralized apps, allowing for the creation of new creative smart contracts. As an open-source movement, DeFi’s protocols and applications are widely available.

Ethereum is well-known for its flexibility, which allows developers to easily create dApps. Because of this adaptability, there is now a DeFi solution for the majority of financial services, with the prospect of developing new, creative financial solutions in the future. Many of these solutions can function together effortlessly because so many DeFi apps are developed on the Ethereum platform.

Current and future DeFi examples

The Ethereum network allows you to transmit digital assets all over the world in real-time. While borrowing and lending are important benefits of DeFi, there are additional uses for savings, such as earning interest on cryptocurrency, trading opportunities, fund management, and insurance.

DeFi currency exchanges

DEXs, or DeFi currency exchanges, are peer-to-peer platforms that allow traders to swap cryptocurrencies with one another. DEXs not only allow for direct trade between participants without the necessity of a middleman, but users may also remain completely anonymous. Traders often manage their wallets and have access to thousands of tokens using their private keys.

DeFi stablecoins

Stablecoins, which are linked to stable currencies such as the US dollar or assets such as gold, seek to remove the high volatility associated with many cryptocurrencies. This implies that stablecoins are more suited for daily transactions than other, more volatile cryptocurrencies. Stablecoins are simple to transport throughout the world, making big sums of money more inexpensive and faster.

DeFi lending

DeFi lending, which is rapidly gaining popularity, allows you to lend digital assets to others while earning income. Lenders can combine their assets with those of others and establish terms using smart contracts. Borrowers are typically required to provide collateral in digital currency to get a loan. This implies that borrowers can access funds in a popular cryptocurrency like Bitcoin while posting collateral in a less well-known cryptocurrency. You can access Bitcoin without selling your collateral if you borrow through DeFi and make interest payments. In some situations, you may be able to borrow more than the amount of collateral you submitted.