Decentralized finance offers an exciting alternative to the traditional financial system. What is decentralized finance and is it really better than traditional finance? How is decentralized finance different?
What is Decentralized Finance (DeFi)?
Decentralized finance (DeFi) is a term used to describe the financial system based on public blockchains. Popular public blockchains include Bitcoin and Ethereum. DeFi holds a number of potential benefits compared to the traditional financial system.
The traditional financial system is so large and vast that no one expects DeFi to completely replace the established financial system anytime soon. But if the two systems can co-exist, DeFi offers many features that could help many people around the world.
Advantages of Decentralized Finance
You may also be interested in checking, “What is Sound Money and Why it Matters?” by Kenny Fowler
Being Permissionless Means Anyone in the World Can Access It
There are significant barriers to participating in the traditional financial system. Things like citizenship status and documentation can prevent you from obtaining even the most levels of service from a bank. Many investments are off-limits to people who do not hold significant wealth. Those who live in developing countries often suffer from sub-standard financial institutions, poorly functioning economies and unstable local currencies.
By contrast, decentralized finance can give everyone the same level of access. A billionaire and a subsistence farmer in the third world would have the same capabilities. Since DeFi relies on peer-to-peer blockchain networks, expensive intermediaries are removed from the process. This makes fees for the remittance of funds much cheaper, particularly across borders.
Transactions across borders can be expensive and slow. The permissionless nature of the blockchain takes borders out of the equation. You can just as easily access your funds and send them to another country as someone else in another country can access their funds and send them to you. With no intermediaries or central authorities involved, fees are reduced and freedom is increased.
Decentralized Design Keeps Information Safe from Manipulation
In the present financial system, banks and other custodial entities hold people’s wealth. This puts a great responsibility on these entities to secure the funds and the sensitive information that could be used to access them.
With the blockchain, the owners of funds have complete custody of their wealth. The wealth can only be accessed using their private keys, which are the users’ responsibility to keep safe.
No centralized entity has special access to your information or funds. Since blockchains are immutable, no central authority can intervene in transactions.
Users are also free to divest their funds from poorly-run economies or authoritarian states and protect their funds in a decentralized blockchain over which such governments have no control. Venezuela in 2019 and 2020 is a perfect example of this. Due to the massive hyperinflation that is taking place there, the use of Bitcoin for protecting the value of wealth has skyrocketed.
Simplicity of Use
Interacting with the traditional financial system can be not only expensive but time-consuming and complicated. Only a few years ago, it was common for all banking to be a physical transaction. You had to physically go to the bank and interact with a teller, and he or she handed you your own money.
The world is much different today. ATMs are ubiquitous for retrieving cash and you can interact with them at any time of day or night. But as the world becomes more cashless, even they are becoming somewhat obsolete.
Smartphones are also ubiquitous. There are currently over 2 billion users who use digital banking, many of them with smartphones. Even two-thirds of the unbanked have smartphones. This means that those same people who have trouble accessing the traditional financial system have all the tools they need to access the decentralized financial system.
For those who still think of money as tangible, the Census Note provides a great way to interact with the decentralized financial system and still have all the security and peace of mind that comes with having physical money. The Census Note is a cold wallet for cryptocurrency that can be accessed using a smartphone. It’s the size of a payment card, making it easy to carry around. The Census Note is a great way to help onboard your friends or family into the world of cryptocurrency. And with lending and compounding features coming soon, they will also be able to lend or borrow their funds with ease.
Decentralized finance (DeFi) has the potential to revolutionize finance. Democratizing the entire financial system won’t be popular with the elites who benefit from the status quo in global finance. But we can take advantage of those aspects that are available to us and they can co-exist alongside the traditional financial system, providing massive benefits to billions of people around the world.