Key players in decentralization are betting that DeFi platforms can make blockchain-based financial transactions more ubiquitous on a global scale.
Twists and turns abound in the global economy as reports of possible new virus strains gain attention. Fold in new Bitcoin highs, and you’ve got an uncertain, yet possibly exciting, environment on the horizon. Enter decentralized finance or DeFi. As fans of blockchain technology will tell you, decentralization offers high security standards without relying on central financial intermediaries, such as banks or exchanges.
In short, DeFi is a blockchain-based approach that maps traditional financial services to create new services and derivatives resulting from the unique features of blockchain. As a concept, DeFi can offer a wide range of financial products and services, such as credit cards, loans, mortgages, insurance, and other financial instruments.
The strength of DeFi platforms facilitates the borrowing and lending of funds, trading cryptocurrencies, earned interest on funds, and more. The question becomes whether DeFi can democratize corporate and personal finance on a global scale.
The rise of finance protocols
Several financial applications are built on the blockchain network. As of December 2020, approximately $12 billion has been deposited in different decentralized finance protocols such as Ethereum, which has become a platform for many companies to build their financial products.
While Ethereum can theoretically accommodate all kinds of applications, decentralized funding is currently being explored most. While DeFi is only an advanced version of the financial structure, whose core function is to receive and give money, inherent decentralized differences must be taken into account when distinguishing it from fintech. Financial services in the cryptocurrency ecosystem will be decentralized, thereby offering newer methods of delivering financial products in ways not seen before.
DeFi systems also use blockchain technology to integrate decentralized applications (dapps) as common virtual tools for financial transactions. Dapps are built on decentralized blockchain technology and are not developed and controlled by a single central entity, company, or bank.
In a decentralized financial system, transactions are immutable, and blockchain cannot be switched off. The use of blockchain in decentralized finance also means no need to control transactions, parties, or asset movements. We may not be at a place where decentralized finance is ready to replace centralization. Still, as blockchain technology becomes more acceptable globally, there should be room at the table for a larger component of finance to be handled through decentralization.
In other words, if fiat-based economies show more volatility in light of medical and political uncertainty, DeFi could become more prominent sooner than anyone expected.
Where DeFi could go
Advocates of DeFi highlight the advantages of being able to take full control over your assets. By executing code on the decentralized infrastructure of Ethereum’s blockchain, for example, anyone with a crypto wallet and an Internet connection can access the Ethereum built-in De-Fi application.
Metronome, the cryptocurrency built on the Ethereum blockchain, positions itself as the world’s first autonomous cryptocurrency, espousing self-governance, reliability, and portability. Metronome’s objective is to be a long-term monetary solution, outliving other cryptocurrencies and leveraging autonomous smart contracts and portability across chains.
The growth of blockchain financial applications are in the midst of slowly revolutionizing finance, allowing for everything from cross-border transactions to credit reporting. The growth of these capabilities can mean a truly decentralized financial reality, in which traditional financial markets interact with digital assets and blockchains. Soon, we may see governments and their central banks create a blockchain fiat monetary system. Within this financial system, users will have access to apps that use the public blockchain to participate in this new open global market.
Plug-and-play apps will allow people to use decentralized financial services intuitively without the complexity of centralized systems. The ability to connect and use these apps in real-time could potentially impact everything from poverty to technological advances.
A truly global economic system
Using blockchain for decentralized financial applications ensures that the technology is accessible to anyone with access to the Internet. At first, it may seem that fintech also uses technology to improve financial services, but the lack of decentralized operations means that fintech, in and of itself, only streamlines centralization. Along with blockchain-based identity systems within Bitcoin or Ethereum, previously segregated access to financial products worldwide could become a thing of the past.
No matter how closed centralized finance has become, DeFi aims to provide financial services that use key elements and functions of the blockchain and create a more transparent financial system.
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. He previously chaired the Vendor Forum of the Federal Reserve Bank of Minneapolis and his resume includes time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific, as well as a number of years as an independent consultant.