Any individual with a basic impression of the existing financial industry knows clearly about centralized authorities' domination. Central banks and national governments can regulate and manage cash flow and the supply of currencies, rates, stocks, debt, and bonds. Banks and financial institutions have almost 100% control over finance and can dictate individuals' eligibility for accessing financial services. 

Can decentralized finance serve as an alternative? The answer to this question has a lot of speculation, along with the support of promising evidence that indicates a potential large-scale transformation of financial services as we know them today. The following discussion dives into a deeper investigation of how blockchain and decentralized apps can change the face of finance.

Why the Need to Transform Future of Finance?

Before proceeding towards the discussion on potential of DeFi, it is important to reflect on the limitations that call for the same. Banks command formidable power over the world today without any doubts. After the recession, in 2015, the five top banks in the US-controlled almost 45% of total industry assets in the country. In the present times, general consumers need banks' approval for all financial services starting from obtaining a loan to conducting daily financial transactions. 

Furthermore, the requirement of various procedures and documentation for accessing financial services also restricts a major share of world population from becoming a part of financial ecosystem. At the same time, it is also important to notice the vulnerability of customers' financial data with banks. Cyber attacks on a large central authority like banks can compromise multiple consumers' sensitive information.

Additionally, customers also demand faster and flexible financial services with the assurance of limited risks of fraud. Financial services customers are also heavily focused on compliance with the strict regulatory requirements in using financial services. All of these reasons point out possibilities for introduction of Decentralized Finance as a reliable solution.

Is DeFi Same as Blockchain?

Bitcoin was one of the foremost and widely-recognized blockchain applications aimed at decentralization and universal accessibility of financial services. However, the speculative and volatile nature of Bitcoin hindered its journey in achieving the desired objective. On the contrary, DeFi, also known as open finance, came forward as a technology with the potential to transform conventional financial systems. Open finance relies on decentralized and permissionless applications, known as DApps, developed on a blockchain network, mostly Ethereum. 

Applications of De-Finance

The potential of open finance can replace almost all financial services known today, such as savings, insurance, trading, and loans. Decentralized finance can shift almost all services offered by financial institutions to the domain of crypto. As a result, it would be possible for shifting power into investors and customers' hands, rather than restricting it to centralized financial infrastructures. Here are some of the common applications of open finance, which provide a clear indication of its potential,

• Decentralized marketplaces and exchanges can support the direct trading of digital assets without any need for centralized exchange. Smart contracts can support the exclusion of any form of dependence on centralized exchanges. 

• DeFi blockchain applications can also support lending and borrowing activities through lending cryptocurrency and depositing crypto assets as collateral. Smart contracts can serve as ideal instruments for defining the loan terms, supervise the distribution of interest, and connect lenders to borrowers.

• Furthermore, open finance can also support the creation of monetary banking services such as stablecoin insurances and stablecoin mortgages. The interesting factor about use of stablecoin points to the benefits of cryptocurrency without worrying about volatility.

How Can Decentralized Finance Change the Future?

DeFi can challenge the old order of financial systems by addressing many setbacks in the existing financial system. Here are some of the notable ways in which DApps could establish their claim as contenders for dominating the future of finance.

• Global availability and transparency

• Exclusion of the need for depending on governments and central banks

• Facility of improved access to financial services for people with restrictions of factors such as resources or physical location

• Limited manual intervention takes away the need for any company or employee to manage open finance. The use of smart contracts deployed on DeFi blockchain executes on their own according to specified configurations. Subsequently, the lower manual intervention takes away the possibilities of errors.

• Decentralized finance also provides complete freedom from national governments or central banks to provide and manage financial services.

• Users could access financial services with limited requirements such as a device, cryptocurrency wallet, and an internet connection.

• Users can interact conveniently on peer-to-peer networks for financial transactions, thereby reducing the need to depend on intermediaries. Therefore, open finance can reduce the significance of centralized financial institutions such as banks and arbitrators. 

• The flexibility of decentralized applications or DApps for financial services also establishes its potential for transforming the future of finance. Users can capitalize on the benefits of interoperability of DApps with other DApps. As a result, they can make the most of the functionalities of the whole DeFi ecosystem.

Challenges for Adoption of Decentralized Applications in Finance

Irrespective of the multiple benefits of decentralized applications for finance, it is important to notice the same risks. Legal and compliance risks are among the foremost challenges, with the lack of documented legal relationships in decentralized applications. Majority of decentralized applications are transformations of existing financial instruments with the use of smart contracts. The dependence on technology can result in anonymity of products or service providers to the user, thereby affecting privacy laws. Simultaneously, different potential interpretations of accountability with smart contracts could also lead to limitations in their use.

Conclusion

On a concluding note, it is clear that the adoption of DeFi blockchain applications is growing rapidly. However, it will have to bear the burden of various challenges, particularly legal. Most importantly, transformation of conventional financial services, which have gained the trust of millions of customers worldwide, will be challenging. 

Furthermore, the lack of education and awareness about decentralized finance could be a formidable setback for its finance adoption. However, the potential of decentralized applications establishes promising opportunities for the vision of a DeFi ecosystem. The arrival of many decentralized apps in finance establishes promising prospects for the growth of open finance.

If you want to learn more about DeFi, enroll for the DeFi (Decentralized Finance) Course, and start learning right now!