Why DeFi could rebuild trust in financial services

To function effectively, society has long depended on people having faith in their institutions. Thanks to the COVID-19 pandemic and wide-ranging failures of leadership, that faith has been tested like never before.

Nowhere is the decline in trust more evident than in the financial services sector. In its 2021 Trust Barometer, Edelman found that only 53% of American respondents said they trusted those in the U.S. to “do what is right” — down 5% from its 2020 survey. You can see this in the battle between Main Street and Wall Street, which played out in January’s GameStop rally. More than just another “short squeeze,” the rally highlighted the fact that many younger investors simply don’t believe in financial institutions.

Related: r/Wallstreetbets vs. Wall Street: A prelude to DeFi bursting onto the scene?

Trending away from institutional authority is also evident in the explosive growth of decentralized finance, or DeFi. By using decentralized applications on the blockchain, DeFi allows individuals to lend or borrow funds, trade coins and earn interest on savings. Their transactions are governed by smart contracts, embedded in the software; no bank, brokerage or exchange is required.

With a digital-first generation, DeFi will become the default

To illustrate how fast DeFi has taken off, examine the total value locked, or TVL, being poured into the DeFi sector. TVL is the best way of charting the success of DeFi, as smart contracts usually require a counterparty to post collateral for any transaction. As of mid-March, almost $59 billion was locked into DeFi. A year earlier, that figure stood at around $500 million.

The overall crypto market — driven by Bitcoin (BTC) — is now worth well over $1 trillion, so there’s a long way to go before DeFi becomes headline news. Though remember: It took Bitcoin nearly 10 years before institutional investors really started to buy in — and it seems that it will take half that time for DeFi to achieve similar…

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