The impacts of decentralized finance in the financial system
Historically, the financial system has been limited to the affluent class and those who have connections. Thankfully, new technology has emerged providing financial services to the unbanked and underbanked. Apart from accessibility, decentralized finance has other benefits it can provide to its users.
This article below originally appeared in the London Daily Post.
Today, the financial system has generated significant amounts of wealth for people who have the right resources, knowledge, and access to financial markets worldwide. Simultaneously, happenings such as the housing crisis of 2008 have caused hardships for the general and affluent population and caused doubt in the current financial system we have.
Until the housing crisis happened, there was no alternative to the centralized financial system, but in the past years, innovative technology was introduced — decentralized finance (DeFi). New solutions drive this technology that has emerged to the current financial system by providing inclusiveness to most of the population.
Decentralized finance has given so much more than inclusiveness to the financial system; here are some of its effects.
Providing access to the unbanked and underbanked
The most significant impact of decentralized finance is the inclusiveness it brings to the people by providing global access to the financial services that were once only available to the wealthier population. This innovative technology powered by FinTech can be used by anyone who has an internet connection and a smartphone. For example, a stockbroker at a top financial firm in the US or a farmer in a remote region in Asia will have the same access to financial services. Barriers such as wealth to invest and proximity to functioning economies, and lack of documentation would diminish.
No more intermediaries
The removal of intermediaries is one of the most significant advantages of DeFi. For example, the remittance fees will become much cheaper for the global population, especially those living overseas and may need to send money regularly. International transfers, such as Paypal, Xoom, Transferwise, and WorldRemit, are some of the apps that provide remittance services that are cheaper and faster.
“Utilizing DeFi is more beneficial since users do not have to follow centralized rules. Direct, peer-to-peer exchanges can occur, given that various values are agreed upon irrespective of the current offline values. Dealers or third-party mediators can also be utilized. However, transactional prices are significantly lower than when using traditional and offline institutions,” says Tony Jackson of Jenco, a decentralized service platform
This means that anyone can send money to anyone directly without going through banks or remittance centers, which usually lengthen the process. The same goes for investments; it cuts intermediaries, allowing traders and investors to invest directly without the need for third-party companies.
“DeFi uses electronic devices to interact and display bidding or asking prices in real-time. Hence, traders do not necessitate being in the same location to initiate transactions. Everything is done virtually, and digital markets are made secure by blockchain technology,” adds Jackson.
With decentralized finance, consumers are provided with more privacy and security. DeFi does not require any validation from a central authority to transact securely. No one will have access to steal anything as long as the users control their private keys or passwords. While in the centralized financial system, the clients’ information is stored on a central server at a single physical location, targeting repeated and reinforced malicious attacks.
The immutability of decentralized networks provides security and gives it the ability to defy any shutdown attempts by anyone. In some countries, the government uses a central authority to censor its citizens from financial services. These citizens can use decentralized finance to protect their wealth and lifelong savings.
Easy to use
Decentralized finance is simple and easy to use. Most of the DeFi apps are plug and play; anyone who owns a smartphone can use these services without the centralized systems’ complexity and time-consuming constraints. This system would allow a woman from China to receive a loan from online lending in the US to invest in a business in Japan while paying off her debt at home, through all-in-one interoperable apps.
Decentralized finance still has a long road ahead. We can’t expect DeFi to take over financial institutions overnight, but the best-case scenario looks like a gradual shift from the current centralized financial system. With this kind of financial system, anyone can conduct their economic and investment activities on the public blockchains and exchange their wealth with centralized systems. This can also provide a hedging opportunity for investors who can diversify their portfolio by having investments in both the systems, thus reducing systematic risks.
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