Decentralized finance has been booming this summer. What is decentralized finance and how does it compare with the legacy financial system?
The Groundwork for Decentralized Finance
When Bitcoin first appeared, it offered a decentralized vision for how finance could function. Bitcoin eliminates the middleman and decentralizes control over the currency, preventing any one group from manipulating the currency for their own particular gain.
When Ethereum arrived, it provided the smart contract. The smart contract is what makes decentralized applications possible and it brought about the amazing potential for tokenization of all kinds of assets.
Benefits of Decentralized Finance
Now that decentralized finance is on the uptrend, let’s compare decentralized finance with traditional finance. Decentralized finance attempts to provide the same services that traditional finance does, but it does so using blockchain-based cryptocurrencies. These blockchain-based financial systems differ from traditional financial systems in the following ways:
There are no middlemen involved
Various loans in the traditional financial system require a middleman or loan broker. This is often because the funding of the loan is one level and then the marketing of the loan is another. With decentralized finance, you deal with the liquidity provider directly, so no one will be taking a cut. Everything about the transaction is controlled by the smart contract. This means that no broker or lawyer stands between the lender and the borrower. The blockchain acts as the intermediary and due to its decentralized design and pseudonymous transactions, it has no interest other than the successful verification of the transaction.
Regulatory paperwork like KYC and identification are not required
This means that you won’t be denied for your credit score because no such verification is required. Instead of being scrutinized at every level by the traditional financial system when attempting to obtain a loan, you can obtain a loan virtually anonymously using decentralized finance. This is especially important for people in underdeveloped countries where large numbers of the population are unbanked. This represents a failure of the traditional banking system that decentralized finance can take advantage of.
Borderless access to liquidity
While regulatory issues abound, there are largely no borders in decentralized finance and anyone, anywhere in the world with an Internet connection can have instant access to liquidity.
The blockchain already secures user financial data in the way users are addressed. The cryptographic hashes that funds are sent to and received from are pseudonymous, meaning they do not contain any identifying information. If a user keeps using the same address over and over, someone could infer the identity involved with a particular transaction, however.
If you like this article, check out one of our previous in-house articles, “The Accessibility of Decentralized Finance” by Census Open Finance.
Since transaction information is already public and pseudonymous, this means that user privacy is built into the blockchain. When financial institutions such as banks are hacked, it is often financial information that is leaked. With blockchains, there is no worry about this information being leaked because it is already public in a largely harmless way. Of course, if the blockchain itself were hacked it would be a serious concern. But given the decentralized and highly secure design of the blockchain, malicious activity is very difficult to perform because the attacker would have to gain a consensus across the entire blockchain.
The Census Note and Decentralized Finance (DeFi)
The Census Note is a cold hardware wallet that allows sending and receiving of funds just like any other wallet. Unlike every other cryptocurrency wallet, the Census Note has the convenient form factor of a payment card. This means that the Census Note wallet can be easily carried around just like all of your other payment cards. Its functions can be accessed quickly and easily using any smartphone. You can check your balance, send or receive funds.
The Census Note will soon support decentralized finance features such as lending and borrowing with Bitcoin. You will also be able to earn interest from your cryptocurrency. The revolution of decentralized finance has largely been driven by cryptocurrency enthusiasts and those with advanced knowledge of cryptocurrency. The Census Note’s new embrace of decentralized finance combines all of the benefits of decentralized finance with a simple and easy-to-use cold hardware wallet that even your grandmother can use.
Decentralized finance offers a vision of finance that is borderless and equitable, accessible to anyone with an Internet connection. This contrasts strongly with the ways of traditional finance. The smart contract is the engine that makes it possible, putting both the middleman and the lawyer out of business while acting as a neutral third party. The potential for benefit as it relates to the unbanked and anyone who does not have access to financial services, for whatever reason, is very promising. The Census Note offers decentralized finance for Bitcoin, taking its simple and convenient model to the next level.