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DeFi might be a global revolution on the finance industry

DeFi might change the finance industry

September 5, 2021 | 

651 Views | 

Jesus Guzman | 

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DeFi became a reality with the launch of Ethereum in 2013. However, it took off three years later, thanks to several entrepreneurs, Ethereum developers and financial investors.

Being a more inclusive financial system, this finance system marks the introduction of an alternative to the current finance system.

Essentially, the finance system aims to remove or reduce the number of intermediaries between participants in a financial transaction.

To achieve that, it encapsulates a wide range of financial applications in both cryptocurrency and blockchain transactions. This new finance system offers a wide range of benefits compared to the traditional system.

Before we get deeper into its advantages, it is essential to understand what it is. So, what is DeFi?

What is DeFi?

what is defi

DeFi is the short form for decentralized finance, an umbrella word for a wide range of public blockchain apps and projects aimed at disrupting the conventional finance system.

In other terms, decentralized finance refers to financial applications that often utilize smart contracts and are based on blockchain technologies.

But, what are smart contracts?

In the simple dictionary definition, smart contracts refer to automated enforceable agreements that are accessible to anybody with access to the internet.

Executing these agreements does not require any intermediary, making them accessible to anyone with an internet connection.

To allow for easy lending, borrowing or any other financial trading/transaction, these applications and peer-to-peer protocols are built on a decentralized blockchain network that requires not access rights.

Most of these applications are built using the Ethereum network. However, there has been a recent rise in the number of public networks that offer more speed, scalability, security and, most notably, cost-saving.

Why DeFi Will Become a Global Revolution on the Traditional Finance Industry

The new decentralized financial system has seen rapid growth in recent years, with cryptocurrency ethics taking baby steps into the traditional financial system.

With such gradual, rapid growth, it is very evident that this decentralized financial system is slowly becoming the much-needed revolution in the traditional finance industry.

At this point, the question is how creatively this decentralized financial system evolves and to what degree it can enhance the lives of the entire population, rather than if it becomes a big player in the global economy.

With the push for the integration of a powerful decentralized artificial intelligence, there is no doubt that it is just a matter of time before it takes a more profitable direction.

Another factor that could take the decentralized financial system in a more profitable direction is expanding it beyond the two chief cryptocurrencies. With the incorporation of low liquidity crypto-currencies, more users could be encouraged to trade, deposit, lend and borrow using this new decentralized financial system.

To further understand how the decentralized financial system is becoming a global revolution in the traditional finance industry, it is essential to learn more about its development and benefits over the old finance system.

The Development of DeFi

You may ask yourself; how did it get its start?

Although it is a pretty new concept in the financial world, decentralized finance has rapidly grown over the years. With an ecosystem of blockchain financial products, it aims at enhancing what traditional financial institutions are capable of.

Essentially, this decentralized finance system is seen as a perfect solution to the challenges presented by the conventional financial systems. For that reason, the next few years might see the decentralized financial system take over the finance industry, replacing the old system for good.

As mentioned earlier, the primary force behind the development of this new finance system is doing away with a central party in financial transactions. A decentralized finance system creates a system accessible to everyone, thus eliminating the need to trust a central authority/third party with financial transactions.

Arguably, you can say DeFi was born back in 2009 with the launch of Bitcoin, as it was the first digital money based on a blockchain network.

However, the launch of Bitcoin was essentially a stepping stone towards the decentralization of financial systems. That is because it gave birth to the idea of introducing changes into the traditional financial world through the use of blockchains.

Therefore, the ‘true’ birth of this decentralized financial system came with the launch of Ethereum and smart contracts between 2013 and 2015.

Ethereum has ensured the rapid growth of this finance system by (a) enhancing its potential in the finance industry and (b) championing enterprises and businesses to develop projects that have become the ecosystem of DeFi.

Advantages of DeFi over Centralized Finance System

Before we dwell on the promising aspects of decentralized finance, it is important to understand its benefits. We have already mentioned some of the most notable advantages, which include the elimination of intermediaries in financial transactions and getting rid of centralized control of finances.

But, what other advantages does decentralized finance has over the traditional finance system?

  • Decentralized

The chief benefit of free DeFi lies majorly in the defining nature of the concept – which means permissionless.

Decentralization is the primary building block of blockchain and is why decentralized finance does not require any intermediary or depend on other corporations for any financial transactions.

The decentralized nature of this new finance system helps democratize banking systems, taking away the pressure of depending on an intermediary for oversight, among other factors, during a financial transaction.

  • Transparency

Another great advantage of a decentralized financial system is transparency. As we mentioned earlier, this type of financial system is built on blockchain technology, which essentially means all codes and data of financial transactions are transparent to everyone.

With such a level of transparency, users of the network can understand every transaction going on; thus, it can build trust.

  • Lending and Borrowing Application

Apart from decentralization and transparency, the decentralized financial system also fosters the rise of p2p lending and borrowing. There are lots of benefits that p2p lending and borrowing offers to the users in the network.

For instance, the cryptographic verification mechanism ensures a faster verification process.

Additionally, smart contracts are used, eliminating the need for a third party in lending and borrowing. Elimination of intermediaries ensures a faster verification process leading to faster transactions between users.

  • Savings Applications

A decentralized financial system also offers complimentary savings products for its users. Unlike the centralized finance system, users of a decentralized financial system can efficiently and effectively manage their savings.

Additionally, the interest earnings on assets a user has in lending protocols, like Compound, is slightly higher than those earned in a centralized financial system.

With a wide range of saving applications, this decentralized financial system lets users plug into various lending protocols, increasing their ability to earn interests.

There are plenty of other benefits of a decentralized financial system. However, these are the top ones.

DeFi and Regulation

Being a pretty new concept in the financial industry, this decentralized financial system lacks clear or properly defined regulatory guidelines.

However, there have been a few isolated cases in various countries where the governing bodies have been forced to develop regulations for a wide range of DeFi-related topics.

Even though the new finance system prospect shows great promise, it raises many considerations regarding policy and regulations.

In most cases, financial regulatory bodies regulate the financial markets and related activities through intermediaries such as banks.

However, a decentralized financial system eliminates the need for go-betweens, meaning these financial regulatory bodies and policymakers are yet to find a feasible way to enforce their rules and regulations.

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