Decentralized finance (DeFi) is currently the only financial system that does not require banks and financial institutions as intermediaries. The primary components of DeFi are decentralized apps, smart contracts, and blockchain technology. Since 2021, decentralized finance has witnessed tremendous growth. For example, the total value of DeFI since 2020 has grown by more than 6900%. In 2023, the compound annual growth rate (CAGR) was around 42.2%. It is expected that from $21.21 billion in 2023, it will grow to $30.17 billion in 2024. These figures suggest that DeFi is expanding globally, as an increasing number of users are realizing its potential.
Growth of Decentralized Finance
The growth of Decentralized Finance (DeFi) has been tremendous since the mid-2020s. The main aim of DeFi is to ensure that financial services are offered by financial institutions and banks without the need for trusted third parties. In 2021, the industry had a peak of over 7.5 million users. In 2023, the DeFi is a billion-dollar industry and has cleared the $50 billion mark. Bitcoin is a major player in the industry and has grown considerably since 2023. Bitcoin for example in January 2023 started gaining considerably. In 2023 the rise in its value was 155%.
Factors Responsible for the Growth of Decentralized Finance
The growth of decentralized finance is due to a combination of factors. It is therefore necessary to highlight the main factors that are popularizing the concept of financial freedom.
Disillusionment With Traditional Centralized Finance Systems
The fiat currencies are no longer the sole medium of exchange. Reckless printing of fiat currencies by many governments has caused inflation in several countries. Some countries such as Argentina and El Salvador have persistently faced economic crises for generations. This is why both these countries along with some European and African countries have allowed or granted official recognition to Bitcoin. Decentralized finance does not have any centralized institution and this is one major reason why Bitcoin and other DeFi are gaining widespread acceptance.
Taxation Changes
The growing disillusionment with centralized finance has prompted many users around the world to try out cryptocurrencies and other financial assets of decentralized finance. This is why many governments are contemplating or have already imposed conventional tax rules. However, there is no clarity and uniformity on how DeFi transactions can be taxed. The landscape currently requires modification of protocols. Moreover, the tax authorities also need to become more familiar with the DeFi landscape.
Regulatory Challenges of Decentralized Finance
Decentralized finance holds the key to financial freedom because it has the potential to break free the monopoly of centralized government-controlled agencies to monitor finance. If utilized optimally and regulated properly, it can grant financial freedom to many unbanked and underprivileged individuals around the globe. It can lead to better financial inclusion and battle financial inequality.
However, there are regulatory challenges since it involves the entire global economy which has different sets of laws and regulations. Once there are standard regulations on data privacy, cyber security, fraud, misconduct, settlement process, market volatility, etc., then there is a high possibility that DeFi will become mainstream. It will either replace or diminish the importance of centralized finance.
Decentralized Finance Can Promote Innovation
The growth of DeFi will have a positive impact on innovation. Innovation in the crypto space is a daily reality as many companies have chosen non-fungible tokens (NFTs). Metaverse is another source of innovation that can lead to high economic growth. For innovation to be successful, it must have high degrees of suitability, a proper governance framework, and ensure business continuity. Moreover, innovations must have an internal control framework.
Also Read- Benefits of Blockchain Technology in Combating Corruption
Looking Forward
The growth of decentralized finance is having a widespread impact on the global economy. With time, it is expected that more innovations and improvements will strengthen the position of DeFi. Many governments have started granting official recognition to Bitcoin and are discussing various regulations to prevent its misuse and make it safer and more acceptable. This is indeed a paradigm shift in the attitude towards cryptocurrencies. Therefore, as DeFi becomes mainstream, financial freedom and financial equality may no longer remain a far-fetched dream.
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