Decentralized Finance: The Global Financial System For Everyone
Decentralized finance (commonly referred to as DeFi) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common beings are Bitcoin and Ethereum.
Since the invention of banking, the global financial system has become increasingly more and more centralized. There is no doubt that this has led to the creation of massive amounts of wealth for major players like intergovernmental organizations, government regulations, massive financial institutions and central banks. Although banking is becoming nearly universal in high-income economies, the rest of the world is still lagging behind. Luckily, technological developments make the right time for a new decentralized financial system to emerge.
There are six primary features that differentiate public blockchains from the private networks:
- Permissionless: Anyone in the world can connect to the network
- Decentralized: Records are kept simultaneously across thousands of computers
- Trustless: A central party isn’t required to ensure transactions are valid
- Transparent: All transactions are publicly auditable
- Censorship Resistant: A central party cannot invalidate user transactions
- Programmable: Developers can program business logic into low-cost financial services
With decentralized finance, anyone with an internet connection and a smartphone could access financial services. Plug and play apps will allow people to intuitively use decentralized financial services without the complexity of the centralized system. It could remove costly intermediaries to make remittance services more affordable for the global population. In the current system, it’s prohibitively expensive for people to send money across borders: the average global remittance fee is 7%. Through decentralized financial services, remittance fees could be below 3%. Also transactions are immutable and blockchains can’t be shut off by central institutions like governments, central banks, or big corporations.
Public blockchains could interact with the traditional financial system to create a new financial model where users could conduct economic activity on public blockchains and exchange their new wealth into the centralized system and hedge against systemic risk by diversifying their wealth holdings in both the central and decentralized system.