Published on September 7th, 2022 | by Bibhuranjan0
How DeFi will Radically Change Finance as we Know it
Decentralised Fiance (DeFi) provides financial instruments without the need for a centralised third party. These can include brokerages, exchanges, and banks. It relies on Blockchain technology by utlising Smart Contracts, which allow frictionless exchange between assets.
Blockchain technology was invented with Bitcoin in 2009 and has taken the world by storm ever since. In 2014, Ethereum; a Smart Contract platform was founded which allows two parties to make agreements with one another using computer code. This process cuts out the traditional middleman, who often takes huge commissions between the buyer and seller.
Many countries are warming towards cryptocurrency, with El Salavador making Bitcoin legal tender in 2021 and India open to a digital currency. Most Governments around the world are still researching the technology, but should release a policy in the next few years.
DeFi has been developed with one case in mind: cutting out the trusted third party, who often profits the most. It first came to prominence in 2019, but the first project released on Ethereum’s main net was the MakerDAO in 2015. The application allows users to lock their Ethereum to create DAI all done via Smart Contracts. The DAI is a stablecoin pegged to the US Dollar.
Nowadays there are hundreds of applications in the DeFi field, from decentralised exchanges (DEX), to market makers to yield farming. Even some of the large names in crypto such as Binance have built smart chains to facilitate DEXs like Pancake Swap.
All areas of finance and insurance can theoretically be transformed by Blockchain technology. Recently, we have seen a sudden change in traditional banking with fintech solutions such as Moneze, Revolut and Wise. These platforms offer way more products than any high street bank, such as multiple currency accounts. Moreover, the currency exchange fees are much lower than that of traditional methods. For a long time, banking has been a closed shop, with only a few names controlling the entire market. Fintech was the first to change this, companies like Revolut are 100% online, offering support via live chat and email, providing a more convenient solution when sending money.
Many industries are moving away from land-based solutions such as banking and casinos. For the latter, players can enjoy all the benefits of a live casino from the comfort of their homes. Convenience is the driving factor. You can even play if you are located in a prohibited area such as the Middle East. Through the use of a VPN, Arabic players can play all their favourite table games. To find the best online casinos, comparison sites check for the best welcome bonuses, advise on playing safely and give honest reviews on each operator. As the world moved from land-based banks and casinos to online ones, the shift may soon occur when many industries migrate to web3 protocols such as DeFi.
Finance directly affects every other industry. Whether it’s exchanging currency, borrowing capital or finding investments, every company is reliant upon banks to operate. DeFi hopes to change this, allowing individuals to use protocols to freely exchange. The largest issue at the moment is scalability. Visa is looked upon as the gold standard in this area, being able to execute 66,000 transactions per second (TPS). Ethereum is nowhere near that, being just 166 TPS. However, the platform is working on the issue with “Sharding” being a potential solution.
It is important to note that Ethereum has competitors; namely Solana and Polkadot. Solana (SOL) is an interesting one, which is becoming more popular especially in the Non Fungible Token (NFT) market. The protocol claims they can process 50,000 TPS and is a fraction of the cost of sending ETH on the Ethereum Blockchain. Competition in the space is good, as companies will build better protocols to accelerate adoption.
As Governments are warming to the idea of digital currencies, our Smartphones one day may contain all our financial records as well as everything else we do. Privacy is therefore a big concern, and whether this data will be abused. Safeguards will have to be put in place to protect individuals against Government abuse.
DeFi is building a system outside of the traditional one, connecting individuals around the world and cutting out the middleman.
Cover Image Source: Pxhere