Decentralized Finance (DeFi) has been one of the fastest-growing trends in the crypto industry, and this might be only the beginning as the end goal of DeFi is to transform financial services entirely.
For a better picture of the adoption pace, consider this; the total value locked (TVL) in DeFi protocols on the Ethereum blockchain as collateral has surged from about $1 billion in June 2020 to over $50 billion in June 2021.
For the uninitiated, DeFi, or decentralized finance, refers to a group of applications that use public blockchain technology as a decentralized infrastructure for internet-native financial services and products. Lending, borrowing, payments, trading, asset management, and insurance are already on the menu of this burgeoning new sub-sector of the global crypto markets.
DeFi offers a wide range of financial services by drastically reducing overhead and letting communities govern financial ecosystems.
Given the potential impact of DeFi on traditional finance and the many great opportunities it provides, businesses can get exposure to this emerging sector to benefit in several ways.
Stablecoins play an essential role in DeFi, as they bring price stability and act as a bridge between the blockchain world and traditional finance.
USD Coin (USDC) has emerged as the leading DeFi stablecoin, with more DeFi transactions carried out using USDC than any other stablecoin in the first quarter of 2021, according to data from Flipside Crypto.
Benefit #1: Attractive Yields
DeFi provides a new potential source of yield for idle cash reserves.
Record-low interest rates, quantitative easing, and stimulus programs implemented by governments have made it difficult to find meaningful yield in the fixed income markets.
Some businesses are already experimenting by investing in Bitcoin as part of their corporate treasury operations. However, DeFi is much broader and at times can offer attractive yield opportunities.
DeFi stablecoin capital markets routinely generate yields between 4% and 8% based on demand for stable digital assets. In particular, DeFi applications with the highest Total Value Locked (TVL) figures, typically in the tens of billions, offer a good mix of technical security, thoughtful protocol design, and return on investment.
If businesses seek greater integration and faster interactions with the emerging digital economy, they can rely on USDC, as the recent OCC guidance enables stablecoins to be fully integrated into corporate treasury operations. USDC can be easily moved in and out of traditional financial accounts, as the OCC issued guidance that US banks may use dollar-backed stablecoins as a payment system, including stablecoins on public blockchains like USDC.
Benefit #2: Access to Alternative Borrowing and Lending
Businesses can easily access DeFi applications like borrowing and lending protocols to finance their business operations.
Small and medium-sized enterprises (SMEs), which often struggle to secure bank loans, are first in line to benefit from accessing capital in the DeFi markets.
DeFi can be a great option for businesses in developing markets, such as Latin America, India, and Africa, where SMEs often lack proper banking infrastructure to meet their financing needs.
With DeFi lending protocols, businesses all over the world can get access to decentralized financial services. While experiments with unsecured loans are ongoing, businesses should be ready to lock up digital currencies as collateral on DeFi applications powered by smart contracts. They can then receive funding against the collateral, to boost business growth.
Businesses sitting on idle cash can also convert their holdings to digital currencies and access lending protocols to lend funds and earn interest. To mitigate volatility risks, businesses can lend stablecoins like USDC on DeFi platforms like Aave and Compound and generate attractive returns. This enables SMEs to hedge against the accelerating inflation as well as strengthen their balance sheet.
Benefit #3: Early Adoption of Blockchain
Blockchain is one of the most disruptive and innovative technologies in decades, and it has the potential to transform financial markets as well as other industries. Adopting blockchain technology at this early stage will put businesses in a position to be one step ahead of the competition.
Blockchain technology can automate processes, remove unnecessary intermediaries, cut costs, ensure a high degree of transparency and security, reduce human errors, and improve user experience.
DeFi is an excellent way for businesses to experience blockchains first-hand, as integrating the technology for internal processes can be difficult and resource intensive. As DeFi protocols and markets mature, technology service providers like Circle will help make it simple for businesses to integrate blockchain technology into their business operations and access the benefits of DeFi.
Getting a head start on DeFi, smart contracts, and blockchain technology is the best way for businesses to prepare for the continued accelerated growth of the digital economy over the coming years. In addition to decentralized access to alternative capital markets and the potential to earn yield superior to other investments, it’s clear that businesses need DeFi now more than ever.