The prosperity of the Internet has driven significant improvements to the user experience provided by traditional financial systems. Digital currencies and other financial services allow us to use currencies in a “smooth” and “worry-free” way. However, these developments have not solved the core problems of traditional finance: centralization and lack of transparency on the facts on the ground. Whether with decentralized finance it will change for the better?
In a world full of intermediaries and highly isolated financial systems. Users have little control over their finances. From how banks use the funds in their savings accounts to how much money the government prints, users have no real authority.
Several intermediaries—governments, banks, insurance providers, and other financial institutions. Controls the system and means indirect costs for users. It also increases the risk of financial crises such as market collapses, inflation, and mass fraud. Moreover, as the global unbanked population exceeds 1.7 billion. This system has exacerbated unequal access to financial services.
Faced with this problem, in the last ten years, with decentralization, there has been a major change in dynamic finance or DeFi, which continues to challenge the status quo of centralized finance. For many bank interested in blockchain cryptocurrency community. DeFi is a “financial revolution”. It started with Bitcoin in 2008 and is now mainly starting to do on the Ethereum platform.
What Is Decentralized Finance (DeFi)?
Suppose A wants to send B 6 euros, or buy a cup of tea. Without relying on the intermediaries mention above. A decentralized financial ecosystem will allow transactions to carry out peer-to-peer. That is directly between the sender and receiver. Simply put, DeFi is a combination of processes, innovations, technologies, and other solutions that allow this to happen even faster.
Due to the lack of a central management entity. DeFi systems are also known as open financial systems. DeFi is not an “intermediate trust” – also a point of failure –DeFi uses blockchain and cryptography to ensure transaction effectiveness and security. Therefore, let us consider the three pillars of decentralized finance.
1. Decentralized Applications (dApps)
These are very similar to traditional financial applications but decentralized. DApps are not centralized servers, but block ledgers hosted on a chain. And the data is stored on a single shared network, network members can access and audit at will.
Users interact with the DeFi system via dApps. Currently, Most DApps developed is the platform use ethereum. But there are also other platforms similar to SSR.
2. A Stable Currency
Value is tied to real-world assets, which solves the problem of volatile crypto (price volatility). Therefore, stablecoins can use for daily transactions and long-term investments. DAI MakerDAO is a popular example of this.
In this stable currency, it usually doesn’t have much effect on the volatility that always happens to cryptocurrencies. They are usually more resistant to keeping prices at these subdued conditions.
3. Smart Contract
Code blocks replace traditional agreements which have many drawbacks. Here, the terms of the contract are codified to automatically perform certain operations. When pre-determined to meet the requirements. For example, paying an amount X to Y at a certain time and date. It uses password encryption, tamper-proof smart contracts and provides higher security with collaboration between blockchain and ai-based transactions.
In smart contracts also provide a high level of security and convenience to the users. This is a breakthrough to cover all the shortcomings that has done before.
The Impact of DeFi on The Future of Currency
Although the overall scope of the impact of DeFi is much broader than this brief discussion. Let’s summarize what has changed our financial system by emphasizing some of the direct ways of a decentralized system.
- Using smart contracts, the DeFi system is basically compliant, and neither party can deviate from the terms of the agreement.
- Decentralization puts control in the hands of users, and ultimately, ensures access to global financial services.
- The system is completely transparent and auditable, because every member has equal access to the network database.
Overall, DeFi can not only solve the main problems of traditional finance, but also completely change the way we use money. And no less important DeFi also gives us full access to the finances that we have.