Decentralized Finance, now a movement, is an anti-fragile ecosystem of financial applications (called Dapps or Decentralised Applications built on top of Blockchain networks.
What do these financial applications do?
As the Binance Academy says: they aim to create an open-source, permission-less, and transparent financial service ecosystem that is available to everyone and operates without any central authority.
Centralized finance consists of players that add multiple layers and costs (think remittance money from expats to their own country). There can be a single source of failure which can bring the whole country down (e.g. hyperinflation in Venezuela or Argentina). Financial inclusion is still a dream (especially post Covid) where fiat money remains in the hands of few (too big to fail).
First, the system is a matrix. There is no single point of failure. The data is on blockchain network spread across thousands of nodes, making any shutdown a very complex manoeuvre.
On top of blockchain, come the Dapps. These allow
- Open lending protocols | elimination of credit checks, Instant trading settlements, collaterize digital assets
- Replace Open Banking | With further evolution of Blockchain, new cryptoassets like stablecoins which are pegged on real-world assets to decrease volatility, no intermediaries, smart contracts for underwriting, risk distribution resulting in lower premiums
- Decentralized marketplaces | DeFi applications that allow trading of digital assets, issuance of security tokens without the need for an intermediary or an exchange. Less maintenance and hence, lower trading fees
- Tighter governance through smart contracts | Every contract is a computer code. This enables automation and reliable execution of 99% of business processes so far required human intervention.
DeFi still has performance issues, since most of the DeFi applications are concentrated in Ethereum network which are slower, new apps are coming with optimized performance and a good user experience.
Decentralized Finance is an alternate universe, where financial systems are open with broader inclusion, lower intermediation and minimal discrimination. This is a tempting idea as we continue to find out additional use cases of broader inclusion of financial benefits to people who have so far been left out of the system.