Decentralized finance (DeFi) facilitates dealing with peers algorithmically in a secure environment enabled with blockchain technology. Traditional finance systems are built on trust, while DeFi is built on technical code.
Third parties in financial transactions have resulted in a lack of confidence with miscellaneous transfers or transactions in many instances. Intermediaries in the current system have to lead to hacks and fraudulent activities like money laundering.
The current financial system involves lengthy bureaucracies in acquiring loans and funds, which is time-consuming and tedious. Cutting out the centralized institutions reduces costs making funds more affordable.
The current financial systems have aspects that DeFi will disrupt:
Legacy Economic Systems Perpetuate and Exacerbate Inequality
Defi gives unbanked access to the financial system as it eliminates manipulation and favoritism. Defi ensures equal opportunity as projects are financed based on the quality of ideas and the soundness of execution plans and not by other factors induced by middlemen.
Inequality limits growth when good ideas are not financed. DeFi has laid the groundwork for cryptocurrency to realize universal access to a financial system uncorrupted by corporations and governments.
The functionality of exchange is organizing trade in different assets, like stocks or foreign currencies, between market participants. The emergence of decentralized exchanges (DEX) means that holders of cryptocurrencies no longer have to leave the crypto space to swap their tokens. Uniswap is a prominent example of a DEX.
Transactions Are Instant and Secure
DeFi offers improved transparency and more robust security while replacing many of the outdated processes. They leverage intelligent contracts to automate many of the functionalities in financial services. DeFi removes the need for trust in the absence of a centralized governing body.
Centralized systems can be vulnerable to a new generation of nefarious hackers. Reputable financial institutions have been susceptible to data breaches, fraud, and security issues. DeFi will address the three-pronged problem of scale, pace, and security, in crypto finance while remaining completely decentralized.
DeFi enables borrowing or lending money on a large scale between unknown participants and without any intermediaries.
DeFi applications bring lenders and borrowers together and set interest rates following supply and demand. DeFi protocols are genuinely inclusive, as anybody can interact with them anytime, from any location, and with any amount.
Interoperability or Cross-Communication
Different systems interact with each other and exchange value. In the traditional financial system, the majority of payments infrastructure is interoperable but limited in scope. There are many positive indicators that DeFi users are reaping the benefits of cross-chain communications and token swaps. Blockchain adopters will leverage the fundamentals of various networks instead of being limited to one ecosystem.
Currently, DeFi is being used in these fields.
- Traditional financial transactions use DeFi in credit card payments, trading securities, and insurance.
- Decentralized exchanges (DEXs) like Coinbase and Gemini facilitate peer-to-peer crypto transactions.
- Non-fungible tokens (NFTs) create digital assets out of traditionally non-tradable holdings, for example, slum dank videos. NFTs produce commodities that were previously not considered commodities.
- Digital wallets operate independently of the cryptocurrency exchanges and give investors access to cryptocurrency and blockchain-based games.
Consumers are rightly demanding a seamless digital experience to hold and handle their funds and assets. Every financial institution should therefore find a way to reduce the risks and challenges involved with the current system. Embracing DeFi can be the best solution for all Fintech companies to improve harnessing their efficiency.
How is your company embracing DeFi?
Let the experts at ASB Resources guide you in embracing DeFi to overcome the challenges and harness the benefits of next-generation financing solutions. Schedule a call with one of our experts today!