The world is evolving along with the financial industry and we need to consider the possibility of decentralised finance taking over. The question for today is, what is DeFi, and will it transform the world?
What is DeFi?
Short for Decentralized Finance, DeFi is financial technology established on secure distributed ledgers. The system takes away the jurisdiction banks and financial institutions have over money, financial products and services.
To deeply understand decentralised finance, you must first know what blockchain technology is. First conceptualised in 1991, Blockchain did not fully come to life until Bitcoin was created in 2008. The primary function of blockchain is to provide an alternate decentralised ledger of all transactions on a peer-to-peer network. A decentralised ledger is the basis for cryptocurrencies, NFTs, and decentralised applications.
Advantages of Decentralised Finance
The goal of DeFi is to make financial services quicker, safer, and more accessible.
The processing and validation of financial contracts are streamlined when smart contracts are used.
These factors give Defi an edge over traditional financial services because they are faster and more reliable. However, there are more benefits to these types of transactions.
- DeFi is available 24/7 from anywhere there is an internet connection.
- It opens up new ways for investing typically reserved for the affluent people of the society, e.g. Yield farming. Therefore, decentralised finance allows anyone who owns crypto to generate income from their holdings by lending.
DeFi vs Traditional Banking
Once upon a time, the idea of decentralised finance, blockchain technology, web3 and even cryptocurrencies was nothing but a dream. Still, we have witnessed growth in their respective sectors over the years. DeFi itself seems to be snowballing, and more people are becoming more accustomed to the idea of it. Questions such as “Will DeFi replace banks” come up often, and we need to consider it.
The whole idea of DeFi is to remove the power financial banks and institutions have over money and others. Defi wants to take away the intermediaries. But is this possible?
Will DeFi Change The World?
The world now, compared to decades ago, has changed quite a bit. We’ve witnessed new evolution in different sectors, and the financial industry was not left out.
We have witnessed the inception and growth of cryptocurrency. Starting as something people paid no mind to, people, businesses and even countries have started to slowly accept it. Countries like El Salvador have even gone as far as accepting Bitcoin as a legal tender.
Why has this happened? What makes cryptocurrency (Bitcoin in particular) so special? This is because Bitcoin possesses specific characteristics that has set it apart from the traditional fiat currency.
Will DeFi change the world? Possibly, the signs are there. But the only way we can accept that Decentralised finance can change the world is if it has these unique features that set it apart.
The DeFi market is one of the most active segments within the blockchain industry, and some startups have even started to adopt it.
In a 2019 report by the Financial Stability Board, it was said that DeFi can offer enhanced financial security, and a more mixed financial system while lessening the significance and impact of existing entities.
But there is also a downside. It was noted that DeFi could additionally bring risk to the financial system, as well as control and proprietorship of large amounts of cryptocurrency that could affect economic policy.
As earlier mentioned, there have been questions of “Will DeFi replace banks?” but banks do not see it that way. Instead, they are looking at ways DeFi will work together with the financial banks.
Banks are optimistic about the influence of Decentralized finance and how it can better the banking industry. It is expected that decentralisation will improve decision-making in economic systems, reduce risks, and enhance record-keeping.
Nevertheless, due to new DeFi startups unsettling already existing business models, they have a lot of catching up to do.
DeFi has opened up the world to new and improved ways to better the financial sector. Removing the need for mediators has made it much easier, faster, risk-free and more reliable.
The world is slowly adopting decentralised finance, and we look forward to how it turns out in the future.