Adaptation of Blockchain/Decentralised Finance as a new mode of Financial systems?

5 min readJan 10, 2022

Decentralized Finance (commonly referred to as DeFi) is a blockchain-based financial system that does not rely on centralized financial institutions such as brokerages, exchanges, or banks to provide traditional financial instruments, and instead uses smart contracts on blockchains, for example, Ethereum. DeFi forums allow people to borrow or lend money to others, speculate on the movement of prices of a variety of assets using derivatives, cryptocurrencies trading, insurance against risks, and earn interest on accounts such as savings. DeFi uses layered structures and highly integrated building blocks. Some DeFi applications promote higher interest rates but are less risky. Last year, more than $ 11 billion (worth of cryptocurrency) was invested in various financial protocols, which were expected to grow tenfold during the 2020s. As of January last year, approximately $ 20.5 billion has been invested in DeFi.

Decentralized Finance is a major trend circulating in the blockchain space. The total amount of locked money has tripled to $ 101 billion since last year began. source: defipulse.com.

The total number of key locks on DeFi protocols is: -

Compound — 13 Billion $

Combination — $ 15 Billion

AAVE — $ 17 billion

Trust v/s Truth

Traditional currencies operate on a Trust model while Blockchain and Decentralized Finance operate on a model of truth.

Trust is based on the expectation that certain groups of people such as banks, government, or any other company behave in a certain way, but we know that humans are unpredictable and we cannot always expect people to behave in a certain way, especially if it involves financial transactions or you know your health and life savings.

On the other hand, blockchain technology-based financing, Decentralized Finance works on the model of truth, and code works in a permission-less manner. If you see some money in your bank account is not true, it shows that you trust the bank to give you this amount. In the case of blockchain, the amount of cryptocurrencies in your wallet actually indicates that you are the “owner” of these large amounts of money according to cryptography and math instead of trust.

Crypto adoption in India

India is ranked second in terms of global crypto adoption after Vietnam but surpasses countries such as the US, UK, and China.

Due to the widespread adoption of cryptocurrencies, more than 3 unicorn startups have been created including WaxirX, CoinDCX, and CoinSwitch Kuber where they became unicorns in just a few months, many of which are setting up an IPO soon.

One recent survey found that among thousands of young people in India one in five had held at least one cryptocurrency.

Significant growth is also coming to the cities of Tier 2, Tier 3 in India and is driven by small towns.

This comes as global crypto adoption grew by 880% over the past year.

Crypto ban in India?

Currently according to Indian laws crypto including Bitcoin and all other currencies lies in the grey area. It’s not illegal to buy nor is it completely legal according to the laws.

The government is soon going to bring in new laws which in my personal opinion will not completely ban as it is too late but will bring in some regulations to prevent bad actors in the game. Private currencies including Monero will most likely get banned because it is impossible to track the transactions and could be used to fund illegal activities.

However, even though cryptocurrencies are not completely legal it is advisable for people to file their tax returns which come under Capital Gains or Income from other sources according to the Income Tax Laws, even for people who have lost their money in cryptocurrencies they can file their taxes under Tax Loss Harvesting and save up some money.

In conclusion, the government is taking time to understand these revolutionary technologies and is not taking any decisions in a hurry which is a very good sign.

Problems in traditional finance

Now, in order to better understand the value proposition of decentralized finance, let’s go through a few common problems in traditional finance and see how they can be addressed in DeFi. Let’s start with the recent situation in the stock market — the famous Gamestop saga. After discovering that Gamestop stock — GME — was overly shorted by some of the hedge funds, users of the popular Reddit group — Wall Street Bets — began buying GME as they believed this could trigger short-term pressure that could lead to hedge purchases, making the stock price higher. At one point, Robinhood and a few other stockbrokers came up with a controversial decision to disable GME trading opportunities and a few other stocks. A situation like this would not have happened in a limited exchange like Uniswap. No one can disable or change the trading power of the platform. There is no single authority that makes decisions on behalf of users. DeFi makes democracy accessible to trade. This situation reveals another problem — decisions made outside closed doors.

Yield Farming as an alternative to banks?

Yield farming is the practice of staking or lending crypto assets to generate higher returns or rewards in the form of additional cryptocurrency.

Yield farming rules encourage liquidity providers(LP) to participate in or lock their crypto assets in a smart contract based on a liquidity pool. These benefits can be a percentage of the amount payable, interest from lenders, or a management token (see mine below). These returns are expressed as an annual percentage yield (APY). As more investors add funds to the liquidity-related amount, the amount of the return issued decreases accordingly.

Popular Harvest Principles: -

Curve Finance

AAVE

Balance

Combination