If you’ve heard of Ethereum or Bitcoin, you’ve already been exposed to DeFi and cryptocurrency -- the next generation of finance, dedicated to giving individuals more control over their financial arrangements and reducing the need for middlemen. For some, the promises of decentralized finance may sound too good to be true. However, advances in blockchain security are making financial freedom a reality.
Decentralized finance (DeFi) is a term applied to the myriad of financial services built on decentralized foundations provided by blockchain technology. Blockchain represents the underlying structure for many cryptocurrencies and allows for multiple copies of transactions to be recorded and stored, decentralizing control of transaction history.
DeFi expands the use of blockchain technology and cryptocurrency from simple exchanges to more complex transactions. As an up-and-coming industry, there are often questions and concerns relating to decentralized finance. Banks, investors, and regulators are just some of the “types” of individuals or organizations that may express apprehension towards DeFi. Even those who invest in DeFi may find themselves asking questions about blockchain security and the stability of cryptocurrency. However, DeFi is a growing industry and it is not going anywhere, anytime soon.
DeFi is set to disrupt the mainstream capital marketplace, and financial institutions like Bank of America are taking note. Earlier in 2021, Bank of America released a report disclosing the shortcomings of Bitcoin. In the report, Bank of America describes DeFi as “potentially more disruptive than Bitcoin.” The financial institution further acknowledges that DeFi has the potential for substantial innovation and is already creating radical changes in the finance industry.
Many experts in banking agree that conventional finance institutions would do well to keep pace with DeFi and consider integration in the future. Netherlands-based ING Bank has also reported that decentralized finance is poised to shake things up in the land of mainstream finance. DeFi stands to replace traditional financial intermediaries with digital smart contracts -- which means eliminating middlemen and enabling individuals to maintain more control over their capital. ING posits further that a blending between centralized finance and DeFi is on the horizon.
Regulators are weighing in on the DeFi revolution, with many citing concerns over potential security issues in the cryptocurrency landscape. As U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler commented recently, “Crypto lending platforms and so-called decentralized finance (‘DeFi’) platforms raise a number of challenges for investors and the SEC staff trying to protect them.”
There are many DeFi platforms and for regulators and nations, this can represent a loss of control over currency. In the case of centralized finance, an attack or error can bring down the entire network. DeFi has no single point of failure -- which means it is more resistant to attack scenarios. However, this also means that DeFi requires specific security solutions for best protection. In the future, regulations for DeFi might include dApp-specific security requirements.
Investors in conventional and DeFi marketplaces have their concerns about DeFi. For those with vested interests in the traditional financial landscape, DeFi’s potential to shake things up can be a concern. The DeFi industry has been valued at $100 billion; even cryptocurrency investors are cautioning that the industry needs to up the ante on compliances before regulators crack down on decentralized finance applications.
Crypto billionaire Mike Novogratz recently commented, “If we want this ecosystem to grow we need to recognize we need to operate within the rules society sets."
Indeed, there are many concerns about fraud and potential losses in the world of DeFi. It is not a secret that there has been theft and fraud on DeFi platforms. Experts note that increasing numbers of inexperienced users give threat actors an edge when it comes to engaging in malicious activity. However, DeFi-focused security and deeper insights into the decentralized finance atmosphere can help prevent incidents.
DeFi represents a new frontier in the financial world. There are many opportunities for growth and as a concept, DeFi can give its users more power over their finances. As the industry grows and evolves, it is anticipated that there will be more regulation. Financial institutions may soon find themselves integrating with DeFi in order to best serve their customers.
Investors and users of decentralized finance are encouraged to do their research before investing in digital currencies and NFTs. Information about digital assets is scattered around the web, and it usually does not relate to security of tokens, exchanges, and Blockchain networks. However, Valid Network, an Israeli Blockchain security and intelligence startup, has recently launched Valid Data, a platform that analyzes digital assets and provides live on-chain insights, risk level indices, and deep-dive information about attack vectors and smart contract vulnerabilities on crypto networks.
Valid Data’s real-time and predictive insights are used by Cryptocurrency traders and exchanges, as well as investors and hedge funds, to make better investment and trading decisions, to protect the value of their digital assets, and to capitalize on market opportunities that only Valid Network’s technology can uncover.