DeFi can solve many of our financial problems – both personal (reducing costs) and national (eradicating corruption)
The structure of modern finance is centralized. Thus, the currency we use is issued by the central bank and to some extent controlled by it. In addition, the central bank has an indirect influence on the cost of our borrowing and savings. In essence, we have delegated control over our financial relations to the government.
This model has several drawbacks. In particular, the human factor in decision-making. Sometimes they are unsuccessful, to put it mildly. For example, against the backdrop of falling oil prices, the Venezuelan government printed huge amounts of money and resorted to several other measures that led to the annual inflation rate of more than 1,000,000%.
But the biggest problem of the centralized system is corruption. On the one hand, central banks have full control over money printing and its value, on the other hand, few details of their operations are in the public eye. So, can we be sure that they are not, for example, acting in the interests of powerful individuals?
DeFi, or decentralized finance, offers a different system. In fact, DeFi is a set of financial applications based on blockchain technology. Decentralized finance enthusiasts are united by the idea of building such relationships where participants will interact with each other without the mediation of authorities, banks, and courts. These platforms work based on smart contracts – a kind of digital analogue of legal contracts.
Smart contracts allow you to make payments, take loans, trade cryptocurrencies (on decentralized exchanges) without intermediaries. Just as Uber united drivers and passengers without creating a taxi company or email, DeFi can unite users of financial services. In addition, blockchain technology itself can reduce the risk of corruption and human error.
How DeFi can change the future of finance
Stock markets operate on weekdays from 9:30 to 16:00. The DeFi mechanism will allow round-the-clock trading without broker intervention, as Robinhood did in January. The online broker stopped trading securities of GameStop, BlackBerry and Nokia due to a large influx of a group of investors who decided to buy up shares of “dying” companies to stir up their prices. In this way they wanted to “punish” investment funds that bet on the fall of these shares.
Manish Kataria, co-founder of Quadency, said: DeFi will not only protect private investors from interference by third parties, but also help them make money. In traditional systems with intermediaries, the participant’s “margin” is only 1-2% of the transaction. Direct operations will allow you to earn about 8%.
Maxim Pertsovsky, Head of Growth at Waves Tech, emphasizes: DeFi opens up investment opportunities for everyone, regardless of financial status. Decentralized exchanges (DEX) allow users to trade digital assets without the participation of a trusted intermediary to store your funds. Transactions are made directly between user wallets using the same smart contracts.
You can start with a few dollars by installing the necessary programs on your computer or smartphone. Importantly, Pertsovsky continues, investors never lose direct control over their assets and can get them back at any time.
Decentralized finance – utopia or close reality?
The DeFi innovation is still in its infancy and prone to mistakes. Smart contracts are much easier and faster to use but provide room for new types of risk. Since the computer code is subject to failures, the confidential information encoded in it is at risk.
In addition, says Rocket Fuel BlockChain CEO Peter Jensen, DeFi is not insured by the FDIC (US Federal Deposit Insurance Corporation). Therefore, participants will also risk losing their capital.
Anyway, the growing popularity of cryptocurrencies and decentralized banking will certainly affect the future of financial services. So instead of ignoring DeFi, maybe it is better to work on their improvement?
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