The COVID-19 pandemic has brought the world to a standstill. And of all things, one of the worst-hit is our financial system. The global stock market dipped by 25 to 30% in March. On April 14, the International Monetary Fund announced that all G7 countries were into their deep recession phase.
Even the banking and finance system’s cumbersome processes requiring human intervention have terribly failed to deliver in these times due to social distancing mandates. This brings to question the capability of our centralised infrastructure to drive us past this economic crisis.
On the contrary, however, the decentralised financial system is gaining grounds and helping more people smoothly transact and conduct financial activities without friction.
DeFi to the rescue
The first cryptocurrency, Bitcoin, sparked the beginning of the evolution of a completely new form of the financial system. While Bitcoin was initially only supposed to act as a store of value and a medium of exchange that did not require an intermediary, the current cryptocurrency space is way bigger than that.
The decentralised finance ecosystem is poised to become everything that our centralised financial system is. It aims to cover all aspects including, but not limited to, savings, tradings, lending, borrowing, and insurance. And all on a completely digital system, with almost no human intervention.
Let’s see how DeFi can help solve the challenges faced by the traditional financial system due to the ongoing pandemic.
Lending and borrowing
DeFi lending and borrowing platforms have gained popularity in recent times, with the DeFi market currently valued at an all-time high of over $2 billion. In a time when lending business with banks will only become less profitable due to decreasing interest rates, both individuals and institutions may choose DeFi system as a long-term solution.
Over the past 100 years, almost 53 currencies have failed due to hyperinflation. And the pandemic has only worsened the condition for multiple countries across Africa and South America. In such countries, the prices of many cryptocurrencies can still seem more stable compared to their national currencies. In addition, stablecoins backed by more stable fiat currencies or commodities can also serve as a great alternation. DeFi, as a whole, can be an efficient workaround in those countries.
After increasing by almost 4.7% in 2019 and reaching $551 billion value, the remittance flow to low and middle-income countries is expected to drop by almost 20% in 2020, breaking down to $445 billion.
This decline, along with the issues of high fees and slow transaction settlement, has created room for a new decentralised financial system. Not only will it be cheaper and faster but also fully digitised, allowing people to transfer funds from anywhere and without the need for banks.
- Overall digitisation
Social distancing is the new normal. According to WHO’s predictions, there is no going back to our previous lifestyle in the foreseeable future. This has increased the demand for digitised banking solutions. And what better than a decentralised financial system to the rescue.
Although DeFi promises a variety of use cases to solve challenges in front of our current financial system, practically, it needs to evolve a lot to become mainstream. Primarily, industry leaders and innovators must work on the security aspect to ensure better ways to protect users. Proper insurance is another crucial need for the present DeFi platforms to win the trust of more people. But we’re clearly on the right track and in the next few years, we may see faster adoption of the DeFi system.