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How Crypto and DeFi are correlated?

How Crypto and DeFi are correlated?

Gaurav Arora, SVP- DeFi Initiatives at CoinDCX explains on how CRYPTO and DeFi are correlated

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The financial systems around the globe are witnessing an exponential shift from the traditional ones. The evolution of DEFI, Decentralised Finance is one of such shifts. For anyone new to this space, it is not uncommon to treat Cryptocurrency and Defi as synonyms. But it is not so. While the two are correlated, they are not the same. To grasp this difference the understanding of Blockchain becomes important.  

Blockchain is the underlying technology that allows transactions to be done without a centralized entity. DeFi is the overarching technology that enables lending, earning, stock transactions, etc. and Cryptocurrency is one of the payment tools often used on these decentralized finance protocols.  

The rate  of growth of this Defi system is such that we are witnessing a leap of 150 years of financial evolution within five to ten years. Thus, the early stages come with a possibility of technological risks. As the code in DeFi is open source, it is prone to hacks, attacks and vulnerabilities. On the flip side there are thousands of contributors who work on identifying flaws and enhancing the code, so eventually this will lead to a more resilient and stronger code base.

The second risk is around scalability and cost . For example, Ethereum, despite being the most common decentralized finance entity, can only support 15 transactions per second whereas Visa, which is the second largest payment processor, can support approximately 65 thousand users per second.

There is constant work being done in this space to enhance productivity; for instance   Ethereum 2.0, has cut down the  electricity cost for mining by 99.9%. Layer 2 scaling solutions are also being developed to enhance speed and scale while reducing the cost of the transactions.

The third risk is called self-custody. In DeFi, users have full custody of assets which can be accessed using a private key.Thus, the downside is that losing the private key would mean that the user can never access that money again, and if somebody else gets access to that private key, then they can take all of the assets. The solution is a smarter and better recovery mechanism. 

Fourthly there are regulatory risks. There's a certain level of anonymity which DeFi brings, which can create risks for money laundering and exploitation. Association of an identity with the transactions without losing the anonymous nature is the key to resolve this risk. 
 
Apart from this, there is one more buzzword which is an essential element in this ecosystem. DAO, Decentralized Autonomous Organization. It can be seen as the next evolution in workplace organizations. The strength lies in the fact that DAO code cannot be broken, thus it can be seen as the most puritan form of democracy. Also, every decision of DAO is available for audit. 
  
As we move forward there are two major concerns with the DEFI Technology which have to be addressed. The first one is from the lens of pricing as the price of numerous tokens were hyped and are now facing headwinds in a bear market . In terms of regulatory ambiguity, the focus must be on removing inefficiencies, unlocking value and distribution.

The experts of this space believe that the next wave of growth is not going to come from just pure speculation, it will come from actual utilities and use cases. Understanding how exactly to regulate this space is time consuming, yet continuous progress is undeniably seen in this field.

Published on: Nov 27, 2022, 5:21 PM IST
Posted by: Vivek Dubey, Nov 27, 2022, 5:11 PM IST