There are so many new things when we talk about technological innovations in financial systems, aren’t there? Among these innovations we have the concept of DeFi, or decentralized finance, as well as blockchain technology, widely used to create platforms for contracting products and services.
In this article, I want to introduce you to the current moment in the financial sector related to the arrival of blockchain technology. In addition to talking about its relevance and the challenges that lie ahead in technology and finance. The topic also offers the opportunity to talk about the creation of a special category in the financial technology sector, the Hybrid Finance.
DeFi, Cryptocurrencies, and the New Banking
Would you like to know more about this subject and think about the future of our banking transactions? Then come with me!
Before going any further, what is blockchain?
For starters, blockchain is a technology that acts as a decentralized ledger of any central controlling interest.
Data or transactions are recorded in connected blocks to form a chain of information. Because of its decentralized nature, the more the technology is adopted, the more people collaborate to develop solutions. One of these is precisely DeFi, decentralized finance.
What is DeFi, or decentralized finance?
DeFi, or decentralized finance, is a set of self-executing codes, enabled through a blockchain.
The differential of this decentralized system is the creation of a free ecosystem, of trust, transparency, and open source. This enables transactions to be made without intermediaries.
The Evolution of Decentralized Finance: A Brief History
This new approach has advantages over conventional centralized financial systems and can operate in a more transparent way, without the need for central clearing houses or custodian services.
By adopting DeFi we replace traditional elements of the centralized financial system with smart contracts.
What is a smart contract?
Even without the centralization of a traditional financial system, DeFis are secure precisely because of their smart contracts. A smart contract sets out the terms of an agreement but runs as self-executing code on a blockchain.
As a result, teams can rely on the advantages of blockchain development, such as its security and accessibility. In this case, DeFi protocols are implemented using decentralized applications, (dApps) where many of the roles are by agreement, written in lines of code.
Called the Future of Finance: Decentralized Finance
Hybrid Finance
In order to continue innovating and pushing boundaries in the blockchain spaces, in the face of the challenges already addressed, a unique opportunity arises to establish a new financial category: HyFi, hybrid finance, which combines traditional, centralized and decentralized financial products.
The hybrid financing definition includes characteristics of both debt and equity, two ends within the financial spectrum, in order to provide financial security. Hybrid financing is where debt and equity meet in the middle, offering investors the potential benefits of both.
Definition: Hybrid Financing is the financial instrument that partakes some characteristics of debt and some characteristics of equity. Simply, it is the financial security that possesses the characteristics of both the debt and equity.
The debt and equity are the two extreme points and, in the midpoint, lies the hybrid financing that offers the investors the benefits of both the equity and debt. Equity gives the right to have a residual claim on the cash flows and assets of the firm and have control over the management. Whereas the debt represents the fixed claim over the cash flows and the assets of the firm, but generally, do not give the right to control the management.
The important forms of Hybrid Financing are Preference Capital, Convertible Debentures, Warrants, options, innovative hybrids and so on.
This is an opportunity to apply a visionary and innovative mindset, building a banking platform that allows compatibility with different financial back-ends, uniting traditional, fiduciary, and distributed accounting rails, establishing the first layer of decentralized infrastructure for this organization.
The Benefits of Decentralized Exchanges: A Look at the Future of Cryptocurrency Trading
Modernization
Beyond the regulatory environment, the development of cryptocurrencies has economic, accounting, and financial implications. It is a new digital paradigm, and the embedded technologies pose a real economic challenge.
In any case, we should consider modernizing accounting systems to keep up with the development of cryptocurrencies. Proof of this is the need for accounting support in cryptocurrency wallets, as the development requires their incorporation into the current accounting system.
These are some of the points of attention that I believe are important to highlight for this new space of decentralized finance, so that it can grow in a healthy way and with all the necessary security.
Conclusion
I hope it has become clear how the financial system (and especially customers) stands to gain by adopting technologies such as blockchain to modernize their operations. With good development and management, technologies like DeFi and HyFi will still greatly impact the way we relate to finance and technology.
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