Decentralized finance (DeFi) is a new iteration of financial system following the evolution of Web3. As its name implies, it deals solely with the eradication of central authorities or government in financial institution.
As a new development with promising future, it has garnered the interest of myriads of individuals over the years. One of the significant happenings since its evolution is the drastic increase in the numbers of fintech (financial technology) companies across the globe.
These developments, among others, pose a great threat to the traditional financial systems. It questions lurks the existence of the traditional way of banking and carrying out transactions.
Economists, financial analysts, as well as Web3/DeFi advocates see the potential disruption of traditional financial systems in no time. In this article, we’ll take a look at decentralized finance (defi) and how it can possibly disrupt traditional finance systems.
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Decentralized Finance: An Overview
Decentralized Finance (DeFi) is an emerging financial technology which uses secured distributed ledger similar to that of cryptocurrencies. It is developed on blockchain technology and keeps record immutable (inerasable).
It is a peer-to-peer financial system which ensures that central authorities are eradicated in financial realm. In simple terms, DeFi is a financial system which renders finance and its regulations decentralizes.
The term decentralization is used to describe the absence of intermediaries in several systems in the industry. With the new financial system, users don’t need to panic about troubles with their banks and exchanges or even government agencies.
To make this possible, relevant application known as decentralized applications (dApps) are developed to execute the decentralization feature of the technology.
Examples of decentralized finance (DeFi) products are Aave (AAVE) and Synthetix (SNX). Examples of DeFi companies are HYPR Corp. Block Ince (NYSE: SQ), Riot Blockchain Inc (Nasdaq: RIOT), and Robinhood Markets Inc (Nasdaq: HOOD) are examples of DeFi stocks.
DeFi relies on blockchain technology to decentralize the financial system, allowing for decentralized financial services and new business models. It makes financial realm open, secure, global, creative, and transparent.
However, amidst all these amazing features, there are still few limitations and obstacles with the system. That’s understandable anyway since the traditional system is also not limitless.
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Traditional Financial Systems: An Overview
Also known as centralized financial system, the traditional way of carrying out transaction entails the keeping of money and other financial assets in banks or other financial body. Anytime you need your financial assets, you can request for it by initiating a transaction.
When you request for a payment through mobile transfer or check, the transaction is processed by a central authority and the body can decide to approve or flag the transaction. Besides, there are limits to transactions that can be carried out using centralized finance.
There is no point emphasizing this point since it’s the normal system we use daily. The use of credit/debit cards and mobile applications to withdraw funds, make deposit, or wire transfers. Like any other system, the traditional financial system is susceptible to fraud.
This is the space decentralized finance has come to fill. It aims at changing the system by coming up with a more sustainable system that will stand the test of time. This new system will not only bring transparency to finance but also lower costs and provide access to capital markets at scale.
5 Ways DeFi can potentially Disrupt the Traditional Financial Systems
1. Increased access to financial services: Decentralized finance (DeFi) platforms can potentially increase access to financial services for individuals who may not have access to traditional financial institutions due to geography, credit history, or other factors.
2. Greater transparency and reduced intermediaries: DeFi platforms often use smart contracts and decentralized networks, which can increase transparency and reduce the need for intermediaries, such as banks and other financial institutions. This can potentially lead to lower costs and faster transaction times.
3. Improved security: Decentralized networks and smart contracts can offer improved security compared to traditional financial systems, as they are less vulnerable to hacks and other types of attacks.
4. More inclusive and diverse financial ecosystem: DeFi platforms can enable a more inclusive and diverse financial ecosystem, as they do not discriminate based on factors such as geography or credit history.
5. Greater innovation: The decentralized nature of DeFi platforms allows for greater innovation, as developers can build on top of existing platforms and create new financial products and services. This can lead to the creation of new and improved financial tools and services.
Final Thoughts
Decentralized finance (DeFi) has the potential to disrupt traditional financial systems in a number of ways. Through the use of smart contracts and decentralized networks, DeFi platforms can increase access to financial services, reduce intermediaries, improve security, create a more inclusive and diverse financial ecosystem, and drive innovation.
While DeFi is still in its early stages, it has the potential to revolutionize the way financial transactions are conducted and to democratize access to financial services. As the DeFi space continues to evolve, it will be interesting to see how it impacts traditional financial systems and the financial industry as a whole.
I’m Abdulmumin Solihu and you can follow me on LinkedIn, Twitter, and Medium for more content on DeFi, Web3, Blockchain, and cryptocurrency.
