The fundamental area of cryptocurrency that is now attracting interest is DeFi or decentralised finance in full. DeFi is a financial services that use smart contracts, that are automate enforceable agreements without the need for intermediaries such as bank or lawyer and use blockchain technology. From November 2017 to August 2020, a total value locked in DeFi contracts has increased from US$2.1 million to US$6.9 billion.

This has been the force behind the huge rise in the market capitalisation of all the tradeable tokens used for DeFi smart contracts. Now it has increased further to around US$15 billion. Most tradeable tokens have increased in value by almost three or four times per-annual. Using The Synthetix Network Token as a case study, it has increased nearly 22 folds. and Aave nearly 180 folds. if bought $1,000 of Aave tokens in August 2019, its worth nearly £200,000 now.

Most of the DeFi is built on the ethereum blockchain network and is the next step towards the revolution on disruptive financial technology that began with bitcoin 11years ago. One of the fundamental area is Decentralized Application (DApps), these decentralised applications (DApps) have started cryptocurrency trading on decentralised exchanges (dexs) like Uniswap. It's entirely peer-to-peer without any institution providing the platform.

*Bet on the outcome of events: You can bet on the out come of an event using Augur.

*Create /exchange derivatives: You can create and exchange derivatives of real-world assets like currencies or precious metals on platforms such as Synthetix.

*Take part in a no-loss lottery: You can take part in a no loss lottery on PoolTogether, here everyone gets back their money and only one lucky participant wins all the interest that is in a shared pool.

*You can buy cryptocurrencies called stable coins, this coins are pegged to the value of a currency or commodity. For example, DAI and USDC are pegged to the US dollar.

DeFi can been also known as LEGO MONEY reason is you can stack dApps to maximise the returns you get. For example, you purchase a stablecoin like DAI and lend it on Compound to earn more interest. Some of many of DApps today’s are niche and future applications might have huge impact on our day-to-day life activities. Like for example, you will be able to purchase a land, a car and a house on a DeFi platform based on a mortgage agreement where you can repay over a period of time.

The agreement would be converted into a tokenised form on a blockchain ledger and will be used as collateral and, if you fail on your repayments agreement, the deeds would automatically shift to the lender because it is automated. By the reason that no lawyers or banks would be required, it make cheaper the process of buying and selling lands, houses, etc.

There haven't been regulators, and DeFi was able to flourish in this vacuum. For example, such as traditional unsecured lending, there must be a legal requirement that will enable lenders and borrowers know each other’s identities and also the lender assesses the borrower’s capacity of repaying the debt. While In DeFi, such requirements or agreement are not needed. In DeFi, transaction is all about mutual trust and preserving privacy.

The regulators have to determine on the delicate balance between constrained innovation and not having the opportunity to protect the society from risks such as individuals investing their money into an unregulated platform, or banks and other financial organizations not being able earn as intermediaries. But its more sensible and profitable to embrace change or new innovation and that exactly what is we are seeing with DeFi.

The US Securities and Exchange Commission (SEC) have made a huge step towards embracing and accepting DeFi by approving and providing support for Arca which is based on an ethereum platform. It is a welcome development and very important one at that, because one of the huge challenges faced towards financial innovation is the hostile environment presented by the old fashioned regulations written for the archaic era.

Some DeFi projects failed because of this. For example, project such as New-Jersey-based Basis, that returned US$133 million to investors in 2018 when it concluded was unable to work because of the SEC rules.

Another reason why the DeFi on the increase is that now mainstream investors are getting involved in DeFi. A large number of highstreet financial organizations have accept DeFi, and are looking for ways and how to start participating. For instance, more than 75 of the biggest banks in the world are experimenting blockchain technology to fasting up transactions as part of the Interbank Information Network, banks such as Royal Bank of Canada, JP Morgan, ANZ and are on the lead. DApps are going mainstream.

Some of the leading asset management funds have started to take DeFi seriously. For example, Grayscale, which is the world’s largest crypto investment fund. It have been managing more than US$5.2 billion of crypto assets and including bitcoin of US$4.4 billion. DeFi gives much higher returns to savers much more than high-street institutions can offer. Using Compound as an example, savers earn an annualised interest rate of 6.75% when you save with stablecoin Tether.

You also receive Comp tokens as well, this is added attraction and advantage. Without account on any bank, just if you are in possession of a smartphone, DeFi has the potential to open up finance to you. One of the major reason for the Spike of people investing their money into DeFi tokens is, they don't wish to be left out of DeFi huge surge. Some of this coin worth nothing in real terms, but we are seeing many irrational exuberance.

Whether we accept it or not, we are into a new financial system that is more liberalised, mutualized and decentralised than what we had before. The question now should be how best to guide its development with strategies to check and balance, that can minimise the risks and spread the potential benefits in DeFi as widely as possible. That should be the challenges for the next few years.