How Defi is Reshaping Trade Financing
The crypto ecosystem is always evolving. One year in crypto is a long time as new innovations come up and products mutate and take new forms as time passes on. Defi , short for Decentralized finance, is a product borne of blockchain tech that seeks to upend the financial industry. An ingenious concept anchored on blockchain tech, it promotes peer to peer collateralized lending without the hassle, paper work and tedious process associated with traditional lending. The Defi industry is estimated to be worth over $ 50 Billion as of October 2022. Even in the current crypto rout, this is a marked increase from its market cap in 2020(closed the year with a capitalization of about $ 20 billion). The main ideology behind Defi is not to get rid of traditional finance, but to make it better and aid it as the world enters into web 3.0. As such, similarities may exist here and there as it grows and takes a life of its own with its core tenets being transparency, inclusivity and fairness. Here are four ways Defi is reshaping trade financing.
Fund raising and Promoting Financial inclusion
First, it has enabled anyone regardless of their status to participate in the global financial system. If you are seeking for financing, the process has been automated and the pricing is transparent and fair. On the other end, Defi has enabled lenders to earn interest from funds they lend out; traditionally reserved for financial institutions. This industry has evolved to the point where founders can raise funds through Defi platforms. Funders can now set up their fundraising platforms on Defi platforms and gain access to seed stage and private funding rounds. They also have access to their own wallet and can easily manage their funds from there
Community involvement in Managing Companies.
Companies can raise both funds and expertise from the communities in Defi pools. Community members can create time to aid in the management and development of products for these companies. In the event that community members do not have capital to invest in some of the listed projects, they can invest their skill and earn rewards and tokens for doing that.
Defi pools have enabled community members to not only gain access to projects but also gives them an upper hand on managing the day to day activities of these projects, Some pools also allow for milestone financing, where the founders can get access to capital in bits and once they have achieved certain milestones. Depending on the governance of each pool, the community may also vote to proceed with certain projects or cut funding on projects that are not gaining traction. This is an effective way to deal with rug pools and situations where founders intentionally delay to launch products.
Adopting the use of blockchain tech in Defi helps reduce overall costs of loans as the loan approval and disbursement process is automated. These saved funds can be channeled into other projects by financial institutions. The cost of monitoring loan performance is also automated and chances of picking up Non performing loans is increased. Blockchain tech is also more secure than legacy financial tech. Additonally,the cost of auditing and maintaining it is considerably lower than that of core banking technologies.
Defi is expected to grow and may ultimately replace traditional financing. Its core value of promoting transparency, openness and fairness in transaction disbursement and monitoring bode well for this technology. While many may be wary of adopting this technology due it complexity, we believe in the long run, the benefits of this technology will outweigh its short term bottlenecks. This will ultimately sway legacy institutions into adopting it.