Bitcoin (and soon after, Ethereum) is the original decentralized funding because no one controls its release. There is no single organization responsible for deciding who owns what. No one is responsible because everyone is responsible.
There is a public ledger stored on multiple nodes and computers on the global network, making it impossible for any central authority to move bitcoins.
In addition, there are a limited number of bitcoins to mine. No one will ever be able to add more of the famous cryptocurrency to that amount, as the Federal Reserve does now with the U.S. dollar.
However, most bitcoins are bought and sold on exchanges, and these exchanges are often privately owned. For the general public, it is simply much easier to log on to a site like Coinbase, Binance, or Kraken and let them hold your cryptocurrency.
A new paradigm: Decentralized finance (Defi) and hybrid finance (Hyfi)
PayPal recently announced that it will allow its users to buy and sell cryptocurrency on its app, which will attract their 314 million customers to this exciting market.
There is a very famous saying in the cryptosphere, “Not your keys, not your bitcoins.” This is cautionary advice from an industry that has been burned many times over. If there is one thing that scares investors away from this asset class, it is certainly the risk of fraud.
And we’re not out of the woods yet: BitMEX, the leading bitcoin exchange, is facing criminal charges in the U.S., while hackers stole about $150 million from KuCoin, the leading Asian exchange.
So, what does this have to do with decentralized finance?
A feature of decentralized finance
Decentralized finance is the next logical step in this adventure. It aims to create financial instruments based on smart contracts that automate transactions without any interference from central authorities.
These smart contracts can be as simple as they are complex. Various decentralized applications offer services such as lending and borrowing money, betting on events without using exploitative sites, or participating in a win-win lottery.
The potential for this is incredible. Imagine buying a house with a smart contract that says that if you send a certain amount of money each month and after a certain time, the title of the house becomes yours. No need to borrow from the bank, no need for notaries or lawyers, and if you default on your payments? The title is returned to the seller.
Why is Ethereum leading the way in decentralized finance?
Decentralized exchanges are at the heart of it all. So you don’t actually own them. The technical side of this issue is not the main reason why DeFi may be the future of finance, but rather a shift in the global economy.
Two very important factors are coinciding right now: a sharp drop in interest rates in the global economic crisis and, according to the World Bank, a sharp drop in interest rates.
There are another 1.7 billion adults who do not have a bank account. Indeed, they are much more likely to have access to the Internet, often through a cell phone, than to own an ATM card.
The largest exchange in DeFi today is Uniswap. It is essentially a combination of software based on the Ethereum blockchain. On Uniswap, people can exchange cryptocurrency using smart contracts. Users don’t even have to keep their funds on the exchange, they just let a couple of participants use their smart contracts from the security of their private keys and wallets.
The problem DeFi has caused is the extreme use of the Ethereum network, which in turn has led to higher exchange fees. The popularity of Ethereum in creating these smart contracts required more network resources and led to higher transaction prices. Now new exchanges are finding creative solutions that don’t rely on Ethereum.
Which is the best: Centralized Finance vs Decentralized Finance
Venice Swap is an open-source, decentralized exchange that will put your cryptocurrency into a better fund to earn interest on your investment. The exchange relies on its own network (Ethereum).
For the developing world, decentralized exchanges will be nothing short of a game-changer, especially for those left behind by the traditional system. But the rest of us will still find affordable interest rates extremely attractive in a global market where many countries are now looking at negative interest rates on their government bonds.
Inevitably, and especially in times of crisis, crypto has attracted a lot of interest, both because of its merits and because of the drawbacks of the traditional centralized financial system.
DeFi is still in its infancy and shows the potential to become an important part of the future global economy. Trade on Venice Swap.