DeFi – The Rise of Decentralized Finance Community
Right from the initial beginning days, all the financial entities have been centralized. The central authority, usually a bank or some other financial institution with the help of intermediaries manage our funds. The general public who invest their money has no voice/opinion, whatsoever on the management of their invested funds. All they get is some marginal amount of profit depending on the performance of the market. Another matter of concern is the associated risk factor which is high in a centralized system. You mustn’t have forgotten the 2008 housing bubble, right.
The emergence of blockchain technology has opened the door of innumerous new possibilities. As we use and manage cryptocurrencies, why can’t we think of decentralizing our financial system?
What is DeFi?
DeFi is a new decentralized financial system built on public blockchains like Bitcoin and Ethereum. All the applications of the system are powered by Ethereum’s smart contracts and are fully decentralized and transparent.
Impact of Decentralized Finance on the World
1). The Financial Services can be accessed globally with a wider reach
If you have an internet connection and a smartphone, then you are rich enough to access this financial services. The users face a lot of barriers such as Status (Lack of citizenship, documentation, credentials, etc.), Wealth (Huge entry-level funds are required to access financial services) and Location (vast distance separates the functioning economies and financial service providers) in the existing centralized system.
But, DeFi system has broken the walls and made the financial system accessible to all of us.
2). The Cross-Border Payments has become affordable
There is no place for costly intermediaries in a DeFi system. The average global remittance fee is 7% which makes sending money across borders costly. In a DeFi system, remittance fees could be below 3%. Implementing this will certainly improve the financial economy of the country. Dharma Protocol provides you with the solution of building a universal lending system where the lender can lend money to anyone from any point of the world. There is no intermediary in this system. Thus, the extra fees which is imposed in a centralised lending system is eradicated in DeFi.
3). Privacy and Security has improved
There is no central party involved in a DeFi system so the users themselves are the custodians of their wealth. They can securely transact without the need for validation from an authority. There is no risk involved.
4). The Transactions are Censorship-Resistant
The transactions can be done without restrictions. Your central institution would never shut off blockchain, so don’t worry!
If the governance is poor and authoritative, users can go for the DeFi system to protect their wealth. For example, Venezuelans adopted Bitcoin to protect their wealth from government manipulation and hyperinflation.
5). Simplicity of Use
It’s very simple to transact in a DeFi system. The plug and play apps allow people to use decentralized financial services according to their will and comfort. Say you are a resident of Africa, you can receive a loan from the U.S., invest it in a business in Colombia, and pay off your debt and purchase a home – all through interoperable apps. In DeFi system, the sky’s the limit.
Advantages of the Decentralized System over the Centralized Counterpart
- The decentralized financial networks are freely accessible for all its users without any restrictions. What you require is just an internet connection.
- There is no central party which can invalidate the user transactions.
- The records are maintained on thousands of computers at the same time.
- The users don’t need to trust a central party to make sure that their transactions are valid.
- The blockchain network is public, auditable and transparent.
- The business logic is programmed into financial services which are low in cost.
There are many use cases of DeFi applications.
1. Payments- the Counterparty in the transaction is a protocol that uses the Bitcoin. The blockchain allows any individual to create and trade their own digital token.
2. Peer To Peer BTC Exchange- the Bisq protocol is an open source peer to peer exchanges which allows you to buy cryptocurrencies in exchange of national centralized currencies.
3. Lending- the individual is allowed access to a much wider pool of willing lenders. Example- Dharma protocol allows participants to lend and borrow different forms of collateralized debt.
4. KYC & Identity- there are protocols such as Bloom, Wyre, SelfKey etc. which one can integrate with the financial services for carrying out KYC, user identity maintenance, security etc in an DeFi environment.
5. Stablecoins- it is a cryptocurrency whose price is fixed. The Tether was the first ever released fiat backed stable coin. Other examples: MakerDAO, Gemini Dollar (GUSD) and Circle (USDC).
6. Asset Management- there are even asset management protocols like CoinAlpha’s Fund Protocol which will caters the basic functions of an traditional asset management such as NAV calculation, investor management, fee calculation etc.
7. Tokenization- blockchain technology is used to digitize a real-world good or service. Security Token Offerings (STOs) represent ownership of financial assets such as a stock or bond. Example- Harbor, a DeFi project that uses R-Token and facilitates the issuance and trading of tokenized securities.
The concept of decentralizing the financial system is in the nascent stage. Until and unless the governments and central banks suddenly cease to exist, you can’t imagine a world where decentralized finance completely replaces their centralized counterparts. Well, that’s not possible.
But can they co-exist? Yes, they can. Public blockchains and our age-old financial system can interact with each other to create a new hybrid model where:
- Users conduct economic activity on public blockchains and exchange new wealth into the centralized system.
- Users can build a portfolio with both the central and decentralized system to hedge against systemic risk.
Therefore, we can expect that decentralized finance will democratize our financial system with the best possible way of managing the wealth.