The advantages of decentralized finance
Decentralization is a concept that dates back to the 1800s after the centralization idea came into popular usage during the post-French revolution government restructuring. Advocates pushed for the idea to give opportunities to French citizens to be more participatory in socio-political and agro-industrial affairs to the extent of fully exercising their freedom. Centralized power is more or less distributed and delegated, such as decision-making, planning, and execution. Applications of decentralized models have long been the foundation of many types of governance in the many areas of politics, public administration, legal affairs, economics, technology, and finance.
State of Decentralized Finance.
Decentralized finance, or defi, for its part, is making a strong statement in our present econocentric culture and money-oriented mentality, especially in the growing cryptocurrency industry. The defi boom was very impressive this 2020, coming from a crypto collateral of only 275 million dollars only last 2019, the numbers rapidly leapt to $4 billion as of July. So why the gaga behind defi?
What makes Defi Defi?
Defi companies are defined by their core structure with the following features: distributed ledger technology, or DLT, in the storage of records, as opposed to a centrally controlled storage; decentralized authority empowering holders to use the platform to control their funds instead of a ruling board of directors; and, the sparing use of algorithms and decentralized info feeds determining currency values and interest rates. Defi platforms perform through decentralized apps, called Dapps. Since Dapps are run by computer code, its neutrality eliminates any kind of bias in using smart contracts to initiate automated financial transactions that are far more efficient, faster, and much more affordable than traditional contracts.
No Central Authority.
Defi forms a blockchain-based industry identical to traditional financial products and services but without any central authority to run those services. We speak of services that include credit and lending services, decentralized exchanges for stablecoins, payments, insurance, custody, and others. Services are provided by decentralized autonomous organizations, or DAOs, without the involvement of middlemen. DAO growth recently trajected to 660% owing to the popularity of flash loans. The interoperability of defi protocols regarding their adaptability and evolution from each other makes them cruise to an accelerated progress.
Accessibility, and Interoperability.
Dapps can integrate with other platforms without asking permission. Such interoperability has given people control and autonomy over their funds in so many interesting ways. They have been used to the traditional financial institutions with centralized authority that has barred the low of income to avail of many services and instead reserving their best instruments to those with large accounts that have further increased the wealth gap. Defi seeks to address it by making trading and investment more accessible with easy-to-use smartphones with an internet connection so anyone can transact anytime wherever they are. Accessibility will not be an issue as anyone can open an account anytime, anywhere.
Without a central authority, defi allows users to lend and borrow from each other. The Know-Your-Customer procedure, credit score, etc. do not apply, but not without the security provided for the lender and their assets. It is also non-custodial that makes users able to control and use their money; however they may want. Traditional processes would have had required pertinent papers. The only thing with legacy firms is they allow collateralization of an assortment of assets such as houses. But soon, defi will tokenize every kind of asset to facilitate the use of collaterals.
When it comes to security, DLT makes all information public given that it is stored in the blockchain, albeit pseudonymous. The DLT protocol will render all records unhackable. The immutable nature of defi is that once transactions are verified, they cannot be reversed or tampered with. Unlike banks, wherein transactions can still be reversed and papers tampered, which can be threatening.
Other Major Issues.
There are still some major issues to deal with before defi can really operate on a mainstream basis. Usability is still a constraint since many platforms are yet to be translated into multiple languages, making them still a challenge to access. Another is its liquidity. While billions are locked in defi, it is still hard to get a loan or an interest for an asset. Also, the congestion and scalability of defi on most Ethereum-based projects can slow down transaction time and increase transaction fees. Ethereum 2.0 is still under development.
Take It Or Leave It.
Within the profiles of the two opposing forces in “defi” and “oldfi” is a narrowed down hybrid solution to keep both running. The transition period both are into makes one cannot exist without the other. Different client base and different needs can separate the two for optimal output. As of the moment, the one thing interoperable for the two is the credit delegation that defi must represent to become the source of liquidity for the entire financial world.
Without knowledge, the financial market can leave you confused and intimidated. It’s either you get scared or won’t invest at all. We may even invest based on the gut and opinions of others that can prove catastrophic at best. Scams abound. Education, therefore, is a must for anyone who wishes to get things safely going within the defi world to avoid the loss, but instead, the preservation and accumulation of generations of wealth.
Defi’s success can be ensured with the placement of self-policing measures and a well-balanced dose of legislation to keep consumers protected without infringing freedom.
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WHY DEFI? was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.