The future of decentralized finance
The future of finance is decentralized. For years, we have relied on centralized institutions to handle our money. These institutions include banks, stock markets, and other financial intermediaries.
However, with the advent of blockchain technology, we can now create a more decentralized financial system. In this post, we will discuss the future of decentralized finance and how it will change the way we do business.
What is decentralized finance?
A wide range of cryptocurrency and blockchain-based financial systems known as “decentralized finance,” or “DeFi,” are targeted at disrupting traditional financial intermediaries (banks, brokers, wealth managers, etc.).
DeFi’s architecture is influenced by Bitcoin’s blockchain technology, which decentralizes the internet by allowing transactional information to be stored across a number of servers. This is in contrast to the current centralized model, where all information is kept by a single entity.
For the time being, DeFi applications are mainly used by crypto speculators hoping to make a killing with sky-high investment returns.
Right now, there is a chance for this to happen. After just making $1 billion in revenue in 2019, the DeFi sector has grown to nearly $100 billion in revenue today. Cryptocurrency traders aren’t the only ones who recognize the need to be ahead of this new technology.
How does DeFi operate?
DeFi provides financial services without intermediaries such as guarantors, thanks to the use of cryptocurrency and smart contracts. Services such as these allow users to lend their cryptocurrency and earn interest in just minutes rather than once per month.
DeFi has many other potential advantages. For instance, users could receive an instant loan, engage in peer-to-peer trading, save cryptocurrency, earn better interest than from a bank, and buy derivatives such as stock options and futures contracts.
Decentralized applications (Dapps) are used to support peer-to-peer business transactions on the Ethereum network. Some of the more popular Dapps allow for stablecoins, digital wallets (like Coinbase and MetaMask), DeFi mining (also known as liquidity mining), yield farming, staking, trading, smart contract borrowing, and lending.
Some of these applications are explained briefly below:
- Stablecoins: Because their value is tied to the reserve currency, stablecoins like Bitcoin and Ethereum have little price volatility. Examples include DAI and sUSD.
- Insurance: Insurance covers specific risks, particularly against smart contract failures and dangers associated with crypto holdings. DeFi insurance does this without involving a centralized insurance intermediary. One company offering this kind of insurance is Nexus Mutual.
- Decentralized exchanges: Users can trade their digital assets directly with each other without the need for centralized brokers. Examples of such exchanges include Uniswap, SushiSwap, Balancer, IDEX, Loopring, and Bancor.
- Lending and Borrowing: Lending and borrowing are critical functions in today’s financial system. With the advent of blockchain technology, consumers can now conduct these types of transactions directly, through services like those offered by MakerDAO and Compound.
- Derivatives (synthetic assets): The value of derivatives contracts is linked to the performance of the assets they are based on. Using cryptocurrency-based synthetics, individuals can trade the values of various assets on the blockchain network without needing to own the underlying assets. Examples include Synthetix and dXdY.
- DeFi Aggregators: These aggregators’ goals are to allow consumers to acquire the best yield/market rate for their transactions and develop more efficient markets in the DeFi ecosystem. Such aggregators include yEARN Finance, Harvest Finance, and ValueDeFi.
Although DeFi is a potentially revolutionary change, it is still based on computer programs. Thus, like any software, it is susceptible to flaws.
A number of DeFi experiments have gone awry because the code wasn’t thoroughly tested. The blockchain sector is likely to self-regulate in the future to protect guard against this.
Since DeFi is still a new concept, there is also the potential for scams and fraudulent applications. Users will need to make sure the apps they use are trustworthy and reliable, just as they do with apps now.
What does the future hold?
As with many inventions, Defi comes with some risks and vast opportunities. The future is indeed decentralized finance. What Defi promises is freedom and accessibility anywhere in the world. That includes methods of making payments.
In the past, our method of exchange in the market was through barter, and over time we have advanced to currency notes and bank transfers. With DeFi, you could walk into a store and pay for what you want with your assets in Defi. The good thing about it is that DeFi changes what you have to what the store wants, making it easy to use different currencies.
The decentralized finance movement takes the promise of accessibility a bit further by generating more money. When you think about all the financial services you use today, imagine if there was a better way to do them. Imagine that anyone with a smartphone and an internet connection could use those services. That is exactly what DeFi promises.
In the future, we will live in a world where financial institutions and other economic operations will be run entirely by computer codes and algorithms. There will be no need for human intervention!
DeFi will enable any product or service to be self-reliant in the economy of things in the next few years. Under the umbrella of embedded finance, financial services will be more incorporated into non-financial products and services.
Defi also promises a way to make passive income through Ethereum-based lending apps. Essentially, a person will be able to earn interest on loans people take out on the platform.
Although there will always be challenges to overcome when working on the cutting edge of new technology, the world of decentralized banking is on the right route to prosperity.
DeFi has the potential to greatly improve the efficiency and security of our financial systems. This is expected to lead to greater financial independence and prosperity for everyone.
Decentralized finance has come to stay, and the earlier we begin to understand and use it, the better it will be for us and our financial future.
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