Revamping the traditional financial sector poses a major challenge, yet recent advancements in digital finance offer an alternative approach to monetary services.

This involves restructuring financial transactions in a more trustless manner through decentralized finance (DeFi), replacing centralized entities with interactions that do not rely on trusted intermediaries. This not only includes core services such as lending and borrowing, but also facilitates advanced contract-based interactions with digital assets.

However, despite DeFi’s surge since 2020, it remains highly complex to navigate. The intricacy stems from its dependence on rapidly advancing smart contract technologies, creating a challenging learning curve for the average user. While offering its novel use cases for FinTech, the sector has its own set of challenges including security vulnerabilities and fragmented user experience.

From niche to mainstream

As the early pioneer for smart contracts, Ethereum has demonstrated the potential use cases of DeFi money markets on Ethereum Virtual Machine (EVM) compatible blockchains. Stani Kulechov, the Founder of the lending and borrowing app Aave, stressed how Ethereum’s blockchain facilitates the creation of accessible, transparent financial infrastructure, significantly reducing the need for centralized intermediaries.​

EVM-compatible smart contracts allow for the execution of complex financial operations secured “on-chain”, where all financial transactions are recorded on public ledgers. However, these blockchains face scalability hurdles, in particular due to network congestion and fluctuating transaction fees. Ethereum handles approximately 20 transactions per second (TPS), while enterprise payment networks like Visa handle 1,667 TPS.

Yet, DeFi is expected to finally attract mainstream users in 2024 with the help of innovations like Real World Asset tokenization and speculations around a potential spot Ethereum ETF approval.

And now that the U.S. Securities and Exchange Commission (SEC) has approved 11 spot Bitcoin ETFs, demand for blockchain-powered financial services is expected to grow among traditional financial institutions.

The next generation of digital finance

As the DeFi landscape continues to evolve, novel solutions are emerging to address prevalent industry challenges. For instance, Layer 2 blockchain scaling solutions are increasingly being adopted to enhance transaction speeds and reduce fees, significantly improving user experience for decentralized apps (dapps).

Additionally, Layer 1 blockchains are also valued for their security as the key value proposition. Solana, for instance, is recognized to handle on average 400 TPS without compromising on security.

Sui, developed by Mysten Labs, is another Layer 1 using a variant of the Move smart contract language. Designed to address common blockchain issues, Sui was developed to execute unparalleled scalability and security while ensuring a simplified user experience​​​​​​.

Originally developed for Meta’s shut-down Diem blockchain initiative (formerly Libra), the Move programming language abstracts the complexity of blockchain transactions. It allows digital objects and assets to “move” more flexibly in a method that is easier for developers to understand.

As the next-generation money market with a $90 million in total locked value, Scallop leverages Sui’s Move language to enable a comprehensive DeFi money market protocol. Built by cybersecurity experts, the protocol focuses on a suite of institutional-grade features with emphasis on accessibility, security, and user-friendly dapps.

In the ethos of DeFi’s modular “money lego” concept, projects built on Scallop such as Typus, Kai Finance, and SuiPearl are making on-chain money markets more accessible to users.

User experience is key

DeFi encompasses both novice and experienced users who generate yield through sophisticated techniques, such as derivatives trading and liquidity provisioning. The industry, driven by the dynamic and competitive market, sees innovation through other blockchains like Solana, Avalanche, and Arbitrum, attracting liquidity from over 1,000 protocols.

Projected to generate a revenue of $26.2 billion this year, the DeFi market is surging ahead despite its inherent complexities and security challenges. In the ever-evolving landscape of Fintech, continuous innovation is crucial; however, this evolution must be accompanied by a rigorous commitment to security measures.

Striking a balance between ongoing advancements and ensuring user-friendly accessibility, on a mainstream scale, requires a seamless and secure financial technology experience.

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