The world is changing rapidly and the internet today has taken the world to another phase. The different segments and sectors of the world has been taken over by the internet. The social sector, the health, business and even the financial system is not left out.
The financial system we have always known has been the centralized financial system of banking and the financial services that comes with it. But with the advancement and the innovation especially since the digital world is moving on to web 3.0. Everything has changed.
DeFi, which is the Decentralized Finance is one of the storm the internet and web 3 has brought to us. We will be exploring this
Table of contents
Introduction to DeFi
DeFi the future of finance
The aim of DeFi
What is smart contract
What is Blockchain
How smart contracts work with DeFi
How is decentralized finance changing the world
Is DeFi the future of banking
Advantages of DeFi
Challenges of DeFi
What Does Defi Mean In Finance
Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. The system removes the control banks and institutions have on money, financial products, and financial services.
Decentralized Finance (DeFi) The Future of Finance.
Decentralized finance is changing the entire world. If you haven’t heard about it yet, you soon will.
Decentralized finance or DeFi will change our society the same way the internet did when it made everything cheaper, easier and faster.
Newspapers, Live Television and retail stores have all been slain by the internet.
The next dragon to follow is the traditional financial system. Over the next decade, the way we bank, borrow money, lend money, receive loan approval and even how we get paid will be through decentralized finance which is DeFi.
The earlier you follow this DeFi trend to learn about all it entails, how this financial disruption will take place, will save you some financial cost in the later future and you can potentially change the course of your financial life forever.
DeFi is an incoming technology in finance which is based on a distributed secured ledger which is quite similar to those that is used in cryptocurrency. DeFi hopes to eliminate the control banks and other financial institution have on money financial services and financial products.
The Aim Of DeFi
The aim of Decentralized finance which is DeFi is to disrupt the entire traditional financial system of banking, stock and the likes. And this is done by removing expensive middlemen, in average the estimated middleman sucks out 6% of the value of global financial report which is the GDP (Gross Domestic Product) each year. And that is 8.5 Trillion dollars a year! Woooowuuuu! That huge.
Many so-called Fintech companies have tried and failed to loosen this loophole of traditional companies and the effect they exact over the world.
Not until the creation of blockchain technology along the smart contract that this disruption began to take place and have it’s life. As it began to affect the traditional financial systems and firms.
What Is Smart Contract
Let me first do a breakdown of what smart contract is!
a smart contract is the name given to a type of software program that is built to run on a blockchain technology. A smart contract can be referred to as a computer program or as a transaction protocol that is intended to control automatically, execute or document legally important operations, actions or events according to the agreement or term of the contract. This smart contract runs on Blockchain. They are stored on Blockchain and operate when agreed conditions are met.
What Is Blockchain
A blockchain is a new way of storing information that is transparent and temper proof. Blockchain is a system of recording transactions which are made in either bitcoin or cryptocurrencies and these transactions are maintained over several computers that are linked together in a peer-to-peer network. In simple words Blockchain is a system of recording informations which makes it impossible to hack, change, cheat or manipulate the system. A blockchain is a duplicated digital ledger of transaction which is passed across the whole network of computers using the blockchain.
The two most popular assets that run on blockchain today are Ethereum and Bitcoin.
Smart contracts creates and carry out all the logic meeting for a computer program to automatically carry out all its activities or task without human intervention.
When you put a smart contract on a blockchain, it allows you to create software programs that can run without the need of a trusted middleman like a bank or credit card company.
Since this need for middlemen is eliminated, it immediately and automatically lowers or reduces the cost which this middlemen pool on the world GDP. This is what the decentralized finance is doing.
The smart contract built on the blockchain used to create softwares that remove middlemen which leads to the low cost or removal of the cost pulled by middlemen or the centralized financial system on the world GDP.
How Smart Contract Works
Now, you might be wondering how these whole thing works. Let me walk you through how the decentralized finance that is DeFi works with smart contract.
Decentralized finance is built on smart contract. The smart contracts are open source and introparable. That means each individual DeFi smart contract can automatically work with another DeFi smart contract.
Compare this to traditional financial firms where each individual firm has to create its own lending software, trading software and risk management softwares. When non of these systems can talk to each other outside it own system.
This creates massive inefficiencies and huge cost that are letter on passed on to the customer or consumers which is me and you. Because the same type of software development, trading, lending, borrowing etc, has to be rebuilt across every single individual traditional financial firm.
But with Decentralised finance, the smart contract has an open source. That means, anyone can use them. So with DeFi, you don’t have to keep rewriting the same software, to do the same job as the traditional system does.
With Decentralized finance, the same computer code can be reused by multiple companies or firms in different ways with no need for creating another code. This ends up lowering cost dramatically and doesn’t end up getting passed on to them consumers.
How Is This Even Possible
You might be wondering how possible this is
This is possible because DeFi smart contract are built with the ability to interact or relate with each other. this means they can communicate with each other even if they are being used by different entities.
This automatically results to enormous cost-saving and this is why there is a high growth and development with the decentralized finance.
The decentralized finance gives access to other financial system as it gives automatic access to other computers using it without any human intervention and this in turn reduces cost unlike the traditional financial system that cost a whole lot of money.
This is very much impossible with the traditional financial system or the centralized financial system. While on the other hand, it is very much possible with the Decentralized financial system and it’s already happening in the decentralized finance which is the DeFi.
DECENTRALIZED FINANCE WORLD
How DeFi is changing the world of finance
DeFi is already changing the world and this is happening already. But let’s take a look at how this is being done.
Small teams of developers have already displaced massive trading firms just the same way Netflix killed Blockbuster videos, in the same way the early DeFi projects killed our huge financial firms.
Already more than 40 billion dollars have migrated to decentralized finance protocols. The same way the Internet changed how we conduct commerce. in the same way the DeFi application and project is changing how we will forever interact with money and financial services like lending, borrowing trading insurance and loans.
There is a new future coming and it will change everything. And the question you have to ask yourself is “how do you get in front of this future so it carries you along instead of leaving you behind?”
Until now Decentralised finance has been very much complex for the average person to get involved. Millions of non-technical people risk getting left behind. But we have dedicated this very platform, a YouTube channel, a Twitter account and our other social media handles to help you out with all the best help you will ever need to put you through and make it easier for you and other crypto enthusiastic. Just make sure to follow up on us and subscribe to our channels and follow us up for the best informations on DeFi, cryptocurrencies and how to make the most out of the online space as we bring you with wonderful opportunities and keep you updated with trends in our niche.
Is DeFi the future of banking?
Defi is an umbrella term for peer-to-peer financial services on public blockchains primarily Ethereum. DeFi takes the basic premises of Bitcoin, digital money and expands on it. Thereby creating an entire digital alternative to Wall Street but without all the associated cost except the potential to create more open free and fair financial markets that are accessible to anyone with an internet connection.
Users typically engage with defy via a software called dapp. Decentralized apps. Most of which currently runs on the ethereum blockchain unlike a conventional bank there is no application to fill out or an account opening. Most decentralized finance application are built on and ethereum the world’s second largest cryptocurrency platform which sets itself apart from the Bitcoin platform since it is being used to build other types of decentralized applications beyond simple transactions.
With the rise in use of DeFi by the large number of the public the traditional finance and banking system stand a high chance of losing their existence and risks being displaced by defi. And this is because of its easy-to-use method and the unbureaucratic system of it’s usage which is opposite to the traditional system. This traditional banking system which is bureaucratic in the sense that you need a credit check, proof of identity and also other form of money verification system are quite tiring and the costly. all these makes DeFi an easy to go option which the general public, especially the few that Know about it have taken advantage. Plus the added advantage that personal information and the identity of a customer must not be relayed or can be kept anonymous even why transactions are being carried out.
The Central Bank of banks are very much worried about the decentralized finance and they call it an illusion.
The government and bank will have no choice but to upgrade to this innovation or risk being replace or displaced by DeFi
Bank on their own part do not need to fear DeFi but try as much as possible to adapt or upgrade to the innovation so as to be able to thrive in this new economy
The advantages of the decentralized finance over traditional banking system
These benefit are the reason for the fear of the decentralized financial system over the traditional banking system and and these are the fact that
Decentralized Finance is permission less and inclusive:
You do not need the permission of any bank manager or the normal financial institutions intermediaries to do any financial transaction of your choice.
The transactions are in real time they are very transparent:
The management is no longer in the hands of human and these help to cub mismanagement and the possible mistake from the management now being replaced by a more stable contract and management that cannot be changed or tempered with. Since there are built on Blockchain technology.
Users can retain custody of their assets using smart contracts or non-custodial crypto wallet based on escrow:
This makes decentralised finance very much more accessible because it doesn’t use intermediaries like the traditional banks doors so people from every social and geographical region or background are able to access and use this financial system of DeFi
Challenges of the decentralized finance
The number of problems facing the decentralized finance technology and this problem sometimes arise from the basis which is the smart contract and blockchain technology on which it is built on and one of them is it
Uncertainty: There is nothing really certain or verified at the moment. it is still undergoing a number of changes and mistakes are being made sometimes.
Smart contract problem:
Another challenge to DeFi is the smart contract itself. Since it is being built on code and the slightest mistake in this code would lead to loss of finance or funds by the consumers. Especially if the code or contract is wrongly built.
There is no insurance in decentralized finance.
insurance plays a huge role in the traditional financial system and this role is that it helps cover for risk in case of loss of fund, but there is no such thing in the case of hacking and loss of funds. everything goes or it is all lost and there is no insurance to back it up. Since there is no insurance yet to back it up.
Transfer of management and responsibilities:
The management that is formerly done in the traditional setting by the middlemen and intermediaries which is cut off or eliminated by DeFi is now being transferred to the users indirectly. Even though the computer softwares like blockchain and smart contract handle the buck of it. In the case of mishandling of funds and loss of code, nothing can be done. There is no way it can be gotten back.
Is DeFi Is A Long-Term Investment?
The DeFi project is still new and developments and innovations are still being made.
Though it has a very high potential and promises which could be leveraged on. As it is now, there are some challenges it faces that are yet to be rectified. Though actions are being put in place to bring this project into actualization.
Hopefully in the nearest future, this changes will be made and improved upon.