One thing clients love to inquire about is “what's next?” and that's particularly true when it comes to disruptive, emerging concepts and technologies.
Fintech is prime territory for the “what's next” inquisition. More to the point, with bitcoin commanding more and more attention, it's reasonable to expect clients are wondering what's in store for the future of the crypto space.
Although bitcoin, and other digital assets for that matter, are under significant price duress as of late, client interest in crypto is still there and many of those clients aren't soon forgetting some of the remarkable bull runs bitcoin has delivered in its 12 years of existence.
Put it all together and the ingredients are there for a “what's next” recipe. This isn't a scenario advisors need to fret about. For starters, many advisors are doing the right thing and reminding clients that for alluring as crypto can be, it only merits small positions within the confines of broader, diversified portfolios. Second, the “what's next” in crypto inquisition is easily answered thanks to a concept known as DeFi.
Drilling Down on DeFi
For the uninitiated, DeFi refers decentralized finance. Though it's still in its early innings, DeFi blends the disruptive elements of fintech with the emerging utility of the blockchain. In plain English, DeFi moves traditional financial services – think loans, brokerages and more – to the blockchain.
“With DeFi, anyone in the world can lend, borrow, send, or trade blockchain-based assets using easily downloadable wallets without having to use a bank or broker,” writes Marvin Ammori of Uniswap Labs. “Ideally, capital should be as seamless as information in the internet age. In particular, settlement should be instantaneous, transaction costs should be minimal, and services should be accessible 24/7/365.”
Another way of looking at DeFi is that eliminates the middle man and pesky fees associated with many financial transactions. As mundane as that part of the business is, unnecessary layers and fees passed onto customers make industry ripe for disruption.
“Potential DeFi applications may include lending platforms, exchanges, digital currencies, and the like.
Like we said, it’s so early but the promise of DeFi is that financial transactions will become faster, cheaper, and more fair,” according to Osprey Funds.
An interesting element to the DeFi story is adoption. It's accurate to say that crypto adoption, even for bitcoin – the largest digital currency – isn't yet high, but it is trending in the right direction. Regarding DeFi, current adoption rates among some corporations, entrepreneurs and a smattering of institutions is impressive for this stage of the life cycle.
As Ammori notes, DeFi has lower barriers to entry, dramatically reduces switching costs and delivers optionality – all attractive traits that can boost the adoption case.
“End consumers are the primary beneficiaries of this innovative environment: Because all applications share the same database (the Ethereum blockchain), moving capital between platforms is trivial. This forces projects to ruthlessly compete on fees and user experience,” he said.
Plenty of Room for DeFi Growth
DeFi, which should be applied in modest allocations, can potentially check another box for clients: Fear of missing out (FOMO) – a condition that could be running high in the wake of bitcoin's last bull market.
Data indicate the largest DeFi currency is Uniswap with a market capitalization of just $11.52 billion. Five of the other top 10 have market values below $3 billion. Those figures suggest a lengthy runway of growth could be ahead.
And for clients prioritizing financial equality and sustainable investing, DeFi can bridge those gaps, too.
“When markets are globally accessible, it can lead to more financial enfranchisement as well. Currently, developing nations are often excluded from financial services due to the high cost of setting up local operations relative to demand, lack of infrastructure, and more,” adds Ammori. “But decentralized financial services — internet-native services with zero-marginal-user costs — can serve marginalized demographics, providing access to services like insurance, international payments, dollar-denominated savings accounts, and credit.”
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