Benefits, prospects and regulation. What will happen to the DeFi market?

Blockchain applications are becoming the foundation of the new digital economy. In countries where access to banking services is difficult, people will be able to use DeFi – decentralized finance – which consists of blockchain-based financial tools. Blockchain applications are available at any time, and simple procedures give many people access to tools for credit, insurance, exchange and investment.

Most existing DeFi apps are based on the Ethereum blockchain, and the number of new applications is constantly growing. The platforms are sort of like banks, but there are no bureaucratic barriers to using them. Blockchain protocols can’t yet lend large sums like banks, but their services are much easier to access.

DeFi is useful for a number of purposes:

Decentralized Exchanges. On these exchanges, users can quickly buy and sell tokens and other virtual assets that are worth real money.

Credit-deposit platforms. Customers of these platforms can lend cryptocurrency to others without involving banks and other intermediaries.

Insurance. Users can insure their assets if they keep money in smart contracts.

DeFi wallets. These are decentralized wallets in which you can safely store and manage your assets.

Derivatives. Smart contract technology allows DeFi users to make money from derivative digital securities such as futures, options, forwards, and others.

DeFi has no centralized administrative structures. All rules for business operations are strictly defined in smart contracts, which minimizes human error. On the other hand, automation makes DeFi users solely responsible for their money. Financial institutions cannot regain access to wallets with lost passwords or return a transaction sent to the wrong account.

The process of creating one's own digital asset and bringing it to market has become much simpler and accessible to almost anyone. Payment processing no longer takes several days, but a few hours at most, and interest rates and commissions are much lower. International payments are usually executed faster on DeFi platforms than through banks.

About two billion people around the world cannot access financial services. They can’t open a bank account, transfer money from one account to another, and so on. DeFi disrupts this scenario by enabling anyone to access financial services quickly and easily. The operations are performed in a few clicks, and users can access their funds from anywhere in the world where there is an internet connection.

DeFi projects are poised to transform the global financial system. Projects tend to cooperate and help each other grow and develop solutions for security and control. Collectively, DeFi projects are creating an ecosystem for all types of financial products, from insurance to loans to savings accounts.

The impetus for the rapid growth of the DeFi industry could come from the introduction of decentralization principles into banks and other traditional financial institutions. However, this can only happen once the decentralized finance industry is more regulated than it is now.

Stablecoins and DeFi have been receiving particularly close attention from regulators lately because of the recent collapse of the Terra network. While this was bad news for the network's token holders, it could be a powerful impetus for the adoption of a legislative framework. For example, Japan's parliament recently passed a bill that clarifies the legal status of stablecoins.

Authorities in the U.S. and other countries need to make an effort to put DeFi and other crypto products on the regulatory front burner. Without it, the technology will remain vulnerable to fraud and money laundering.

But with proper and standardized legislation that protects users and creates a legal framework for developers of decentralized applications, DeFi could become an alternative to the existing financial system that offers easy access, fast transactions, and low-cost services.