People are beginning to see the light in decentralized finance. But central authority has refused to totally accept the new system even with cryptocurrency altering the status quo. Even though we have experienced a level of stagnancy to the centralized financial domain, a good number of crypto startups are springing up with beneficial ideas and similar motives.
The purpose is to make financial services accessible to a reasonable extent on a global scale. And also, to embrace blockchain technology in finance as a means of accelerating the spread of decentralized services.
DECENTRALIZED FINANCE (DeFi)
In a nutshell, having a Decentralized Finance (DeFi) means building a new world. One of the characteristics of this system is accurate global accessibility of financial services. These services comes with low and safe transactions. A world where you know what happens to your assets and investments.
Also, Decentralized Finance is an open financial system that allows various small financial tools and services. These tools include protocols, digital assets, dApps built on a blockchain, and smart contracts.
Furthermore, Bitcoin and other cryptocurrencies have created and is still creating alternatives to secure our finances without external bodies. However, note that these cryptocurrencies have not really decentralized the financial system. Rather, they have decentralized the issuance of money and its storage.
Few problems hinder a complete decentralized finance system, they are:
- Most of these crypto based projects are in the hands of centralized companies that lack transparency.
- Decentralized currencies can be accessed via a centralized access point like exchange.
- Due to the flexibility, the Ethereum platform is however the primary choice for the decentralized finance (DeFi) application. But there is no limit to this blockchain platform.
The foremost reason for decentralization in the finance sector is to give you full control over your assets. Also, quite a good number of developers of financial apps are adopting open-source protocols. These protocols will cover everything trading through decentralized exchanges.
With all protocols being open-source, it allows anyone to build new financial products on top of them. Developers across the globe can also collaborate together to create new products. These products will lead to faster innovation and a strong network security. You can trade, store, and invest your assets in the blockchain. And earn a much higher return than from the traditional financial system. Since there are no intermediaries handling your assets, you gain complete control over your investments. In other words, you become your bank.
WHY A DECENTRALIZED FINANCE IS THE FUTURE
Consumer data lacks security in the hands of a large central authority. They are prone to hackers who expose personal data of individuals. But even with this, they keep asking users to give out their identity on a daily basis.
Consumers always lack full access to loans and experience issue while accessing their funds. Decentralized Finance (DeFi) offers solutions to these issues through digital transformation strategies.
Additionally, Blockchain technology provides an acceptable solution to the individuals’ problems. It handles needs, and makes sure there is no relegation in financial institutions. With Blockchain, you can achieve a more direct route to customer. It does this by removing middlemen and creating an effective consumer system. Decentralized Finance through blockchain offers a more accessible banking system with strong network security.
Also, Decentralized Finance via public blockchain is open and accessible to anyone in the world. There is no need for verification by a central party. It is faster, and cheaper. It also permits anyone with an internet connection and a smartphone to access financial services. This, in turn, reduces the population of individuals with poor banking experience.
APPLYING DECENTRALIZED FINANCE TO THE REAL WORLD
The advancement of Open finance platforms offer the potential to transform the lives of everyone with bad banking experience in the world.
Also, the issue of loan is one challenging area that can be addressed by concentrating on the advantages of decentralized finance. Presently, it is quite impossible for an individual who doesn’t receive bank services to borrow money. This restriction is because of no credit score or bad history with a banking institution. The Decentralized Financial gateways connect borrowers with lenders. This eliminates the credit check process. This is one of many ways Blockchain fixes the Fintech domain.
CHALLENGES ATTACHED TO DECENTRALIZED FINANCE
It is normal that every high financial product comes with additional risk. No matter how enticing Decentralized Finance sounds, it comes with a list of challenges.
- First, cryptocurrency requires special knowledge and has its own risk. You are responsible for your own financial needs. You are allowed to duly follow the process of multi-factor authentication with absolute privacy.
- Also, investors do not receive benchmarks or historical data to go through before opting for any investment plan. Unlike the traditional financial system, Decentralized Finance users cannot ascertain risks associated with certain investments. So it is either they make enquires on their own or bear whatsoever risks that comes with such investment.
- An individual (DeFi user) must stay updated with changes in service terms between different exchanges, wallets, and other crypto platforms.
POPULAR DECENTRALIZED FINANCE PLATFORMS
Compound: Borrow and lend
This is a Blockchain powered lending and borrowing dApp – one of the most flourishing parts of open finance. With this, users can deposit their crypto in the Compound Contract as collateral and can borrow against it. The system then automatically matches lenders and borrowers, adjusting the interest rate dynamically on the basis of demand and supply, and other open lending protocols.
Uniswap: Token exchange
This is also a cryptocurrency exchange platform which runs completely on smart contracts. This allows users trade well-known tokens straight from their wallets. It uses a different mechanism called Automated Market Making for direct settling of trades near market price.
In addition, users can also become liquidity providers by supplying the crypto to Uniswap contract and earning share of the exchange feed.
Augur: Market prediction platform
It is one of the decentralized products for prediction of markets. Users vote based on the result of events by attaching a value to the vote. Although the present prediction market platforms are new. They do offer a potential view into the future, whereby users are able to predict the future by tapping into crowd’s wisdom.
PoolTogether: Zero loss savings platform
This decentralized platform enables participants to deposit DAI stablecoins in a common box. At the end of every month, one participant wins all the interests and everyone else gets their initially made deposits back.
BlockFi: This wealth management platform offers a Crypto Interest account where you can earn up to 6.2% annually. You can earn interest, borrow USD, grow wealth, and do more with your crypto.”
SALT: This is also a Global platform that has an insurance policy which covers 100% of the collateral. And offers you collateral protection from theft, fraud or third-party breach. Also, it provides sound methods to manage, hold, and capitalize on cryptocurrencies.”
These decentralized platforms gives you access to extra security, and accountability with no requirement of credit checks which certainly makes them more enticing & inclusive. However, they need Cryptos as collateral for most of these loans, which may be a challenge unless we see a widespread adoption of Cryptocurrencies. Having said that, the underlying crypto collateral theme itself can catalyze the advancement of the broader crypto economy.
Also, most of these platforms, however, are still in the stage of infancy with limited offerings. Educating the general public about these decentralized platforms would perhaps be the first step in helping this new facet of futuristic finance mature, expand and achieve the massive potential it presents.
DIFFERENCE BETWEEN DECENTRALIZED FINANCE AND OTHER BANKING PRODUCTS
The major disparity between decentralized finance and other products is that DeFi is an advanced version of the financial structure with the same motive of receiving and giving money. However, there are still some obvious differences between FinTech and DeFi.
- First, the operations of Decentralized finance is independent, that is, no one handles the centralized body or institution. Everything is rather handled by algorithms written in code through smart contracts in the decentralized finance environment. DeFi apps run without any human involvement once a smart contract is engaged.
- Decentralized finance comes with a clear code of transparency unlike the traditional banking apps. There is absolute no privacy as everyone understands the function of the contract.
- Also, irrespective of location, the nature of dApps platform is to function globally. The access of DeFi services are the same around the world.
- Unlike the traditional banking system, there are gatekeepers or middlemen to approve transactions. Anybody can orchestrate decentralized finance applications and virtually anyone can use them.
THE FUTURE OF DECENTRALIZED FINANCE (DeFi)
With Ethereum leading the way, the future of Decentralized Finance is a paradigm shift to a better place that put individuals in charge of their finances, instead of depending on centralized authorities. In a decentralized financial system, stolen data or information will be null and void without the owner.
This will reduce the rate of fraud and identity theft. As individuals migrate to become the center of their own personal data system through total control of their own identities, the business risk of large data breaches is reduced.
Also, with crypto as the latest digital sacrifice of an industry that has been around since the beginning of time. In the time to come, we anticipate to see every single financial service we use today.
However, the first generation types of Decentralized Finance apps depend mainly on using collateral as a safeguard option, meaning, you will have to own cryptos and then offer it up as a collateral for borrowing more crypto.
We are already having a glimpse of huge innovation occurring in the insurance domain as a result of the latest iterations of Decentralized Finance apps. A good number of the present day Decentralized Finance loans are over-collateralized, which means that, the loans are made safe because of the huge asset kept in the reserve.
DeFi holds a future of crypto wallet becoming the portal of all the digital asset activities. You can imagine it as a dashboard, which does not only show the assets that you own but also how much of it is locked up on different open finance platforms like pools, loans, and insurance contracts.
In addition, there will be a shift with focus on decentralized governance and decision-making. The DeFi community, however, is looking for ways to enable stakeholders to vote on decisions, introducing a much wider range of DeFi use cases.
After all the speculations around new Decentralized Finance, possibilities are being designed and made, something new is happening on the open financial system front – cryptocurrencies are bringing money online & giving people ways to make money on dApps. The thought on the functionality of money is being challenged with every new disruptive launch.
The fact that the future of DeFi and the future of money lies in the hand of anyone who can code is nothing less than interesting for people who have no idea what it is about.
In all, decentralization is not a bad idea considering how rapidly the world is growing. Technology is the main thing. So, it is necessary that you understand that we are still in the early days of DeFi but the potential is huge and it holds promises of a better future. We are set to see new and better financial products we have not seen before.
However, the complaints about the system are largely due to its relative youngness in the market. In no distant time, it will move to complete open banking systems with virtual currencies and a connection between global banking systems.
Blockchain will change the finance industry as a whole, paying attention to every detail. The time will come when we will see the rise of Decentralized Finance (DeFi), and its adoption in brilliant finance software development. And not just in the financial sector, but other sectors will begin to embrace Blockchain and decentralization.
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