Revolutionizing the traditional financial system with decentralized finance
Over the past few years, the global economy has made momentous advances. The global gross domestic product (GDP) has hit its highest point since 2015, and the growth of technology users has accelerated like never before. Because of all the economic progress the world is experiencing, people are expecting that traditional finance will continue to thrive and steal the spotlight. But due to continued operation barriers, this development is hampered.
The heightened globalization and technological advancement have resulted in a new stage of consciousness in society. This consciousness empowered individuals to ask more from the financial entities that govern their assets. The growing technological accessibility has freed up some of the barriers that have been preventing most of the population from accessing financial services and participating in the capital markets and the global economy. This is why many are starting to reject the costly and time-intensive financial system that has long impeded overall economic growth.
More people are now gaining increased access to their financial information, so many are beginning to be protective of their assets and demand centralized institutions to be more responsible for their actions. Blockchain technology offers various solutions to the challenges in the current financial system through decentralized finance (DeFi). DeFi is set to eradicate many flaws of the traditional financial system and promise to revolutionize it to benefit everyone, especially the unbanked and underbanked.
How DeFi is addressing the current problems in traditional financial systems
The use of blockchain technology in the financial industry allows for the rise of decentralized financial services that are more innovative, interoperable, borderless, and decentralized. DeFi products and services can reduce transaction costs, facilitate open access, broaden financial inclusion, encourage permissionless innovation, and provide new opportunities for entrepreneurs and innovators.
“There is a lot more to it than that, however. When you look at countries plagued by extraordinary inflation rates, digital currencies, and, in particular, Bitcoin (BTC), have proven to provide protection against such. There is also a decreased reliance on third parties given the fact that DeFi is permissionless and non-custodial. Furthermore, transparency is increased significantly given that you see on-chain cash flows for any protocol all while remaining pseudonymous,” explains Ganesh Swami, CEO and Co-founder of Covalent, a company that provides API access to Ethereum-backed assets and protocols.
Every country offers various financial services, including savings, insurance, loans, and investment. Decentralized finance will create a global alternative to these financial services that were once restrictive and controlled by a centralized entity. Anyone who has access to the internet and owns a smartphone can be a part of the financial services DeFi offers.
“DeFi is so powerful because it makes the world of financial products and services more efficient, cuts out middlemen and increases yields on money. Just take a normal bank loan as an example. A DeFi loan can be automated in a way that cuts costs and time from application to payout to a couple of minutes. Now, just think about the last time you tried asking your bank for money,” shares Felix Mago, co-founder of DASH NEXT, an end-to-end crypto payment solutions.
Innovative DeFi services
“DeFi is solving real problems. We live in a world where you’re lucky if you get 0.5% APY on your bank savings account, where you face painful bureaucracy to take out loans, and where most financial transactions between two parties involve a large set of intermediaries who all want their cut. DeFi is a >10x improvement in all of these areas and more,” explains Alex Svanevik, CEO of Nansen, an analytics platform that helps crypto professionals surface the signal in blockchain data.
Decentralized finance has revolutionized traditional financial services by providing a permissionless and non-custodial system. This has removed any third-party entities that govern and manage financial institutions. With DeFi, users are in control of their assets and money. No more intermediaries that control and delay access to essential financial services. For example, to avail of lending services, users won’t need to go through tedious processes that are daunting.
“Transparency is the biggest value DeFi brings to lending, with all collateral and payments being clearly visible. Traditional lending platforms were essentially gatekeepers who single-handedly decided whether a borrower is qualified for a loan based on vague underwriting and servicing criteria. That’s one of the biggest impacts DeFi has had — the ability for borrowers to access loans without a middleman’s permission,” says Xiaohan Zhu, Co-Founder and CEO of Meter, a DeFi infrastructure with a built-in, crypto-native, metastable currency.
With DeFi, various financial services are reinvented by removing intermediaries along with the lengthy processes that they offer. Apart from lending, DeFi also provides alternatives to traditional financial products, including investment, and savings. It also introduced a new way of trading through decentralized exchanges (DEXs), an asset exchange platform without a centralized authority.
“Decentralized exchanges are a great option for smaller projects to enter the market. It democratizes the access to capital for micro and small businesses all over the world, providing them with more opportunities centralized exchanges can offer,” shares Victor Larionov, CEO of Priority Token, an STO/IEO and ICO marketing agency.
The future with DeFi
Decentralized finance has been proving its worth as a new system that can revolutionize the traditional financial system. By offering alternative financial services, DeFi can address the current challenges of traditional financial institutions. Through its innovative technology, users can now fully realize the power of the financial system.
The concept of autonomous and distributed financial services is somewhat experimental and volatile at the moment.
There is currently a conscious attempt by the new crops of DeFi solutions to create improved infrastructures that would make DeFi more inclusive. This trend has spurred the creation of bridges between…