Transforming the traditional financial system with decentralized finance
Editor’s Note: This article was originally published on Jinse.com, and has been translated into English.
Blockchain technology offers a multitude of solutions to different industries such as finance and supply chain. Many experts believe that this technology can transform traditional finance through decentralized finance (DeFi) as it can potentially eradicate many of the challenges the existing economic system has. It also promises to provide access to the financial system to the underbanked and unbanked, allowing them to enjoy its benefits in the future.
The financial system of every country consists of various services, including loans, savings, insurance, investments, and many more. With decentralized finance, there will be a global alternative to these financial services. Anyone can access these services simply by using a smartphone with a stable internet connection. One of the objectives of this innovative solution is to draw over 1.7 billion unbanked and underbanked people into the global economic system so that they can contribute to the economy.
For decentralized finance to achieve its objectives, it has to offer different services that can match with the current services of centralized financial institutions. Currently, DeFi offers various services lending, investments, exchanges, and data management, among others.
Accelerated DeFi adoption
In the past months, decentralized finance has been gaining a lot of attention. The value of the industry has been growing since it was first introduced in 2017, which shows that DeFi is proving itself to be useful in the current financial landscape. Apart from its usability, one reason why decentralized finance is proliferating is its decentralized nature.
“DeFi is decentralized and open-source, so it means that people have access to code and can build new products on top of or that complement existing projects. This means that the DeFi space can innovate rapidly, a huge contrast to the closed ecosystem of traditional finance which develops much more slowly,” says Stani Kulechov, CEO of Aave, an open-source and non-custodial protocol for money market creation on Ethereum.
2020 is the year for decentralized finance, and one of the primary reasons for this is its composability. The explosion of new financial tools this year has shown the flexibility of DeFi that the traditional financial system cannot do.
“The recent DeFi boom is directly driven by the high yield, but fundamentally speaking, that more relates to the innovation of DeFi and readiness of the DeFi product. The high yield draws much attention from traditional capital which leads to the boom of DeFi waves. And the readiness of the product will keep part of the capital and users in DeFi,” explains Jean Miao, Co-Founder of MCDEX, a decentralized derivatives exchange.
Because of this recent DeFi boom, new innovative DeFi products have been introduced in the financial markets, one of them is synthetic assets. “Synthetic asset usage and issuance will experience exponential growth and multi-chain adoption in the next few months, as it is the next logical step in the booming DeFi ecosystem,” says Felix Mago Co-Founder of Dash NEXT.
Decentralized financial services
DeFi has reinvented the traditional financial services by providing a “trustless” system. This means that financial services offered do not require any centralized authority to govern and manage these institutions. With decentralized finance, users are custodians of their own assets and money. This removes the intermediaries that the traditional financial system has.
“For example, if I try to take out a traditional loan, my potential lender would screen me to see if I qualify for the loan. This same process exists in DeFi, but with one key difference: the information gathered during the screening process is shared with the entire blockchain instead of being shared with a single lender,” says Lorien Gabel, CEO of Figment, Canada’s largest blockchain infrastructure and software provider.
Apart from removing intermediaries and removing lengthy processes, DeFi also offers decentralized exchanges (DEXs), an asset exchange without a centralized authority. DEXs promises a more secure way of trading, eliminating any threats of being hacked since a single entity does not handle assets traded in these platforms.
“DEXs address one of the most glaring issues of crypto trading, turning over custody to a third party. Centralized custody is a major security risk, and somewhat ironic for a technology meant to liberate users from lock-in and control by third-party platforms. DEXs address this by enabling users to trade using any custody solution they want, including their own,” shares Alex Wearn, CEO and CO-Founder of IDEX, a high-performance decentralized exchange.
What lies ahead
Decentralized finance can potentially provide solutions to the current problems of the traditional financial systems. Through its innovative products and services, more people can now have access to the financial system that were once limited. In the coming years, DeFi is said to transform and provide a new landscape in the global economic system.
Image credit: Pixabay
Featured in the Story
Aave — Stani Kulechov
Stani Kulechov is the founder and CEO of Aave and ETHLend. He is a seasoned entrepreneur with extensive experience developing technology in the crypto, blockchain, and fintech space. Stani is also a mentor to many founders and advisors of ICOs and blockchain projects and has spoken at numerous FinTech, Blockchain and cryptocurrency events, particularly on topics related to Ethereum Smart Contracts.
MCDEX — Jean Miao
Jean Miao is the co-founder of MonteCarlo DEX, a decentralized derivatives exchange for trading perpetual and futures contracts. Outside of MCDEX, Jean believes in lifelong learning and is a frequent crypto trader.
Figment Network — Lorien Gabel
Lorien is the CEO of Figment Network, Canada’s largest blockchain infrastructure, and services provider. In his past, Lorien grew one of Canada’s first commercial ISP’s Interlog, to over 150 employees, 65,000 customers. Lorien also has been known to run divisions of Fortune 500 companies (Micron), and spearheaded the exponential U.S. growth of a UK based tech company (MessageLabs) as Global VP Business Development. He has served on the advisory board of numerous start-ups.
Dash Next — Felix Mago
As Co-Founder of Dash NEXT & Dash Thailand, Felix is pioneering to enable and scale crypto payments on all verticals with a cooperative approach, involving partners all over the world. Felix is the Author of the “Bitcoin Handbook” and Co-Founder of FUTERIO, a Southeast Asia based gateway to Blockchain and Co-Founder of the German Blocktech Institute, helping startups and corporations from all sectors finding and implementing their Blockchain potentials.
IDEX — Alex Wearn
Alex Wearn is the co-founder and CEO of IDEX, a cryptocurrency exchange focused on performance and security. . He has spent his career in software development, including time at a marketing analytics startup that was acquired by IBM and as an analytics project manager for Adobe. Prior to IDEX, he led the product management efforts for Amazon Logistics’ capacity planning. He has been hacking on crypto startups since 2014, transitioning to full time with the launch of IDEX in 2018.