DeFi has been a fantastic example of how well smart contracts can work and how we can rely on them to cut out the middleman in so many industries that are well overdue for an overhaul.
In this blog post, we examine some of DeFi’s shortfalls and what the future may hold with RealFi.
Why is DeFi not enough?
At the height of the last bull run, there was approx $180bn locked up across the 100’s of DeFi protocols. At the time of writing this value has dropped significantly to $47bn.
But is DeFi itself all that revolutionary and useful for the everyday person? Let us take a look at both sides of the transaction.
The lender can stake their assets or add them to a liquidity pool and receive a decent return for doing so. The return they can get is in most cases well in excess of what they could earn with a traditional bank.
From the lender’s point of view, DeFi gives them some real utility and it is something that both individuals and institutional investors can get value from.
Next up, we move on to the borrower.
To borrow using DeFi you need to post collateral of at least 100% (normally 120%) of the value of what you are borrowing. This is because little (or in some cases, nothing) is known about the borrower.
In practical terms, why would anyone need to borrow $100 worth of an asset, while locking up $120 of another asset in a smart contract? This does not have any real-world application. Ask yourself, would my grandmother ever need this?
As such, DeFi has only been used as a means of speculation by investors, which has been a major reason why we see so much volatility and greed in the crypto markets.
What is RealFi in a nutshell?
RealFi seeks to use digital identities to build a credit score system, which will then enable protocols to be developed that mimic traditional finance, but in a decentralized way.
The advancement of digital identities that distinguish you from other users, but still hide your true identity, will be what is needed to get us to a place where someone can borrow from a DeFi protocol without having to overcollateralize their loan.
In traditional finance, when you go to your bank for a loan, they already have access to lots of data on you (bank statements, prior lending) to help them assess your risk profile.
The same can’t be said for DeFi currently, there is no way to distinguish one user from the next.
If you want a far more technical answer to what RealFi is then check out this video by Cardano Founder Charles Hoskinson.
RealFi means real adoption
We in the west live in a completely different world from many of those living in developing nations. We have instant access to all types of financial products as we can always verify our identity, where we studied, who we are married to, etc.
This is not the case everywhere.
Over 1.4 billion people still remain unbanked in the world, and these are the people who stand to gain the most from RealFi technology.
Access to finance, insurance, and mobile networks are all real possibilities with RealFi.
While those in the West may only see a marginal benefit in the beginning from switching from traditional finance to RealFi, the change will be driven from elsewhere.
Don’t expect any huge breakthroughs soon.
RealFi can be a game changer for crypto adoption, but in reality, this may take years of further development and trial and error before we can have any type of functioning decentralized peer-to-peer RealFi lending and borrowing marketplace.
While we still don’t have widespread regulation in Ireland or many other parts of the world, regulations are about to start catching up with crypto development in the coming years and may shape what kind of RealFi ecosystem we end up with.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.