A Comprehensive Guide To Decentralized Finance
The way in which the value of something was perceived has always been constantly changing throughout history. For a considerable length of time, money has held its supremacy in being a representative of value. Although money as we know it has existed for quite some time, the way in which it interacted with its consumers has been undergoing a lot of terraformation.
One of the latest and the most revolutionary transformations that the world of finance has been impacted by is cryptocurrency. Not only has it made a lot of people reconsider their perception of money but the technology behind it – blockchain has been a game-changer in a lot of ways.
The blockchain technology has been so revolutionary that it has given rise to a new dimension of finance called decentralized finance, commonly abbreviated DeFi.
Before we understand what DeFi is, it is important to analyze the relevance and necessity of decentralizing the current financial setup.
If there can be one word that will encapsulate all of what the financial ecosystem of today is about, it is centralization. A lot of bodies like banks, reserve banks, and federal reserves issue currency which is considered to be the driving force behind today’s economy. Money today is used by all banks and in all trades, both government and private.
A direct consequence of centralization is the regulation of demand and supply. This extent of centralization makes the entire system susceptible to human errors. What happened to Venezuela is the best example. The massive printing and issuance of high-value currency notes lead inflation to rise by 1,000,000%.
There is a narrow-yet-deep chasm between people who have access to investment markets and people who don’t. In addition, there is not much control over how the stock investment money is being spent.
It can be inferred that there is quite a lot of disparity, discrepancy, and discreteness in today’s world of finance. To counter this, decentralized finance was introduced.
As the name implies, decentralized finance is a new-age financial ecosystem that does not depend on any centralized body. To keep up with the decentralization that the new ecosystem promises, the entire technology is built on the digital, decentralized, and immutable ledger called the blockchain.
Until now, the blockchain has been associated with cryptocurrencies like Ether and Bitcoin. Considering the fact that both these blockchains are open source, it helps develop apps that can help conduct almost all financial activities without intervention or a sensor ship from a centralized body.
DeFi also opens up new financial avenues to more than a seventh of the world population that does not have access to basic financial services. The universal access and the absence of censorship is just the tip of the iceberg when it comes to the advantages of DeFi.
It is to be remembered that DeFi is not an evolution but a revolution. To put it in perspective, fintech, as we know it, it’s about making a turboprop plane faster. Decentralized finance is about removing those turboprops altogether and fitting them with jet engines.
The Core of Any Financial System is The Process of Sending and Receiving Money.
While this process is uncompromisingly carried out, there are a few key differences that place DeFi a notch above traditional finance.
The benefits of DeFi are not just confined to paper. There are a lot of real-world benefits that decentralized finance can provide considering today’s economic flow.
It’s quite known that the remittance market from foreign workers is a big contributor to global transactions. The fees that they will need to pay in case of currency exchange and transfer are quite exorbitant. With DeFi, however, it is quite possible that the cost of the transfer can be slashed by 50%. This heavily contributes both to employee productivity and economic growth.
Another area where decentralized finance can create a positive impact is when it comes to lending and borrowing. Currently, the banking system restricts loans to people who have a good credit history. In spite of possible repayment capacity, a person without any banking history becomes ineligible for loans. With the blockchain technology, decentralized finance can connect borrowers and lenders, rendering the credit checking process obsolete.
The two advantages discussed above it’s just a flicker of an example of the vast financial possibilities that DeFi can make possible.
It is true that DeFi brings a lot of advantages but it is not completely painted in pink. There are a few challenges associated with this transition. The most prominent of them would be the fact that handling blockchain and its manifestations required specialized knowledge, something that an average person who transacts is not likely to possess. It also picks up the responsibility of the user to take care of the credentials governing the access to the decentralized financial system.
There is no centralization associated with it, there is no way to retrieve your access. They have also been concerned about security and privacy. These concerns can be addressed by interesting your DeFi development to a reputable blockchain development company.
The current world of finance is backed by rich historic data. This greatly contributes to making intelligent investment decisions. However, with DeFi, there is no such history available, making it difficult for market and risk assessment.
There have been a lot of Decentralized Finance Projects that have already demonstrated the feasibility and practicality of this new dimension of finance.
There is no question on the feasibility, practicality, and profitability of DeFi in the near future. The growing adoption of blockchain technology and its endorsement by big brands like JP Morgan and IBM only make its acceptance increase in its intensity with every passing day.
If you would like to explore this domain, all you need to do is get in touch with a blockchain development company that specializes in DeFi. They will take care to understand your business requirement and move things forward in the most profitable way.
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