To some, cryptocurrency represents a powerful and potentially lucrative asset class and currently boasts a cumulative market capitalization in excess of $709 billion.
However, suppose we delve beyond this eye-catching number. In that case, we begin to see that crypto actually betrays a vast and game-changing fiscal innovation, which has the potential to revolutionize the world’s financial markets and how payments are made globally.
In this post, we’ll discuss the associated concept of decentralized finance while asking how this can impact the world of forex?
What is Decentralised Finance?
The term decentralized finance is directly linked to cryptocurrency and the underlying blockchain technology that underpins digital tokens.
More specifically, decentralized finance (DeFi) represents an immutable and open alternative to the global financial services sector, along with its various products such as insurances, loans, and savings.
As the name suggests, decentralized finance negates the need for third-party controls, guaranteeing far greater transparency levels while also negating the risk of manipulation and fraudulent activity. It also makes the financial services sector far more accessible to individuals, so long as they have a viable Internet connection and a smartphone or desktop device.
One of the best embodiments of this is the rise of cryptocurrency in the online gambling niche. Bitcoin and Ethereum casinos enable individuals to place wagers with complete anonymity without linking their associated bank or credit card accounts.
How Will This Impact the Forex Market?
Interestingly, we’ve seen numerous nations launch their own stablecoins in recent years, with these entities helping to minimize volatility in the marketplace as they’re pegged directly to a fiat currency.
Make no mistake; this is paving the way for the concept of decentralized finance to shape the forex market of tomorrow, in much the same way that Bitcoin helped institutional investors to transition from the safe-haven asset of gold to the poster boy for cryptocurrency.
This ties into the fundamental and benefit mentioned above of decentralized finance, which makes even complex trading concepts more accessible to aspiring traders and enables individuals to trade lucrative crypto tokens quickly and profitability.
We should also recognize that decentralized finance is the fastest growing blockchain sector and, therefore, can open the forex market to an increasingly motivated and global audience.
However, there are also risks associated with DeFi, just as there are similar financial market entities. It’s certainly vulnerable to the risk concepts synonymous with all financial markets, particularly those that are fundamental such as credit risk and liquidity risk (the latter of which refers to the ease with which assets can be bought and sold).
The liquidity risk is particularly pronounced when trading certain tokens, which are bound by a finite supply and (in some instances) increasingly high price points.
Beyond these universal risks, it’s also important to consider others exclusive to decentralized finance and its impact on entities such as forex. One of the key factors is the exposure that’s caused as a direct result of DeFi’s reliance on its underlying infrastructure layer, which is powered by various blockchain applications (such as Ethereum).
Some of the associated risks are intangible and not necessarily finance related, and investors without a clear understanding of DeFi may struggle to operate profitability within this complex and advanced marketplace.
Featured Image by Csaba Nagy from Pixabay