The current Indian banking system has served as a cornerstone of economies since the mid-1800s, facilitating economic transactions, encouraging savings, and supporting investments. The sector has continued to run without much disruption. In the age of technological advancement and with the emergence of blockchain, however, we have witnessed the development of a new financial system, powered through decentralised finance (DeFi).
DeFi is not just a buzzword—it is here and rapidly growing. Across the globe, people are using DeFi for loans, investments, and even to earn interest on their savings. Believed to be the industrial revolution of our time, it aims to transform traditional finance through technology, promote financial inclusion, and democratise access at a time when a startling 25% of the world’s population is unbanked!
How does DeFi work? What is its value proposition?
When you make a transaction using a traditional banking system, it is entered into a private ledger that is controlled and owned by big financial organisations, along with all of your previous transactions. A blockchain is a distributed public ledger that operates in a decentralised manner and stores financial transactions as computer code.
Think of companies that help you trade currencies, give out loans or facilitate payments across the world. In each case, you currently rely on a bank or broker—some centralised authority—that offers these services. Decentralised Lending is a popular use case of DeFi.
For instance, X has 100 Ethereum (ETH) that he wants to lend out to earn interest. He deposits it into a decentralised lending protocol like AAVE, which automatically matches them with borrowers and executes the loan via a smart contract. The interest will be then determined by supply and demand and X earns a portion of the interest paid by borrowers, which is automatically credited to their account. The entire process is automatic without any human intermediaries. X doesn’t need to know the lender as the smart contract enforces the loan terms.
DeFi allows for open, transparent, and permissionless financial services that are accessible to anyone. It coordinates financial services publicly with authentication and transparency by leveraging blockchain technology and smart contracts, providing financial services without the need for centralised intermediaries like banks.
Rise of DeFi in India and its future
Digital penetration has ushered Indians, especially the younger generation, towards diversifying their portfolios through new-age investments like crypto currency. India has surpassed 154 countries to take the top spot in terms of DeFi adoption, according to the 2023 Global Crypto Adoption Index. As per a recent report on the state of crypto currency in India, 17.6% of Indian crypto investments are parked in DeFi utility tokens (17.6%) like SushiSwap, DIA, Yearn.Finance, DFI.Money, Aaave, Compound and others.
DeFi provides more transparency, programmability, elimination of middlemen, accessibility, and inclusivity than traditional banking systems. Still, there are a number of obstacles standing in the way of DeFi’s widespread acceptance, including volatility, market risks, security concerns, and the general public’s faith in established systems.
Chief Digital Officer (CDO)
Broadridge India
Regulatory compliance, disclosure and education are essential for building confidence and investment in the crypto market. Regulatory Collaboration and disclosure on DeFi platforms will help establish clear guidelines that protect users. Despite the number of challenges, Crypto assets continue to excite a broad base of users. It is vital that users are well informed about the crypto assets they are investing in. The requisite for the industry and its regulators is to create standardised, easy-to-read disclosures to clearly inform investors. There is a need for a purpose-built disclosure regime focused on delivering the right information about each crypto asset to current and potential users in a medium of their choice in a clear, easy-to-read format with links to additional information.
Empowering Young India to Take Charge of their Financial Future
The future of DeFi in India looks promising. It has the potential to transform India’s financial landscape, driving financial inclusion, fostering innovation, and empowering individuals to take control of their financial future with a wide range of uses – from straightforward services like savings accounts to more complex ones like giving investors or corporations access to liquidity. Now, the question is “when” rather than “if”.
By implementing DeFi, the Indian FinTech ecosystem hopes to transform the financial services industry in a manner akin to that of Unified Payments Interface (UPI). DeFi has the potential to spearhead this financial revolution in India, democratising finance and giving people the ability to take charge of their financial future, given the correct legislative framework and greater public education.
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