DECENTRILIZED FINANCE (DeFi) SIMPLIFIED.
To people, beginners, laypeople, or newbies in the industry, DeFi or the entire blockchain concept seems to have contained so much technical jargon — a lot of complicated and confusing terms that appear strange even to the most learned person. Even the smartest man in the industry would need some time to understand these terms.
This post has condensed complex issues, simplified technical jargon, and made it digestible for better understanding.
INTRODUCTION
Since the inception of humanity through modern development, humans have been dealing and transacting with each other, exchanging goods for services and vice versa. Through human advancement, the need for a medium of exchange hence currencies or, simply, money.
Money has been said not just that bill you exchange for goods and services; rather, it has been developed into four main stages; “collectibles, store of values, medium of exchange, and unit of account.”
Money lacks intrinsic values, backed by people’s trust in a centralized controlling body (banks and financial institutions). Hence, the establishment of different financial institutions (banks) to manage and regulate the supply of available currencies. Thereby creating a centralized (Traditional Financial ) system. (TradFi)
Humans run these systems (TradFi). Humans are susceptible to mistakes, corruption, and mismanagement.
With the fast-growing importance of currencies, the institutions’ power has also increased rapidly. People have to trust their decisions in savings, investing, and borrowing.
It іѕ nо dоubt thаt humаnіtу іѕ beginning tо lоѕе truѕt in оur fіnаnсіаl іnduѕtrу оwіng tо ѕо mаnу fасtоrѕ lіkе being ѕuѕсерtіblе tо frаud, tоо muсh ѕесrесу, dеlау, аnd ѕlоw trаnѕасtіоn, іnѕесurе trаnѕасtіоnѕ, small interest rates on investment and saving but with a huge interest rate on borrowing among оthеrѕ. Hence the need for a decentralized financial system ( DeFi) that is open to all, immutable, and can support a large volume of transactions.
The need for DeFi becomes more pertinent because traditional financial services are not available to everyone. The world is made of an average of about 1.7 billion people. The Traditional financial institutes can also not provide the necessary infrastructure and more access to money for everyone out there.
DeFi has created a free financial world, where no rechecks are done for approving our loans, sending money abroad is just a click away, іnvеѕtоrѕ have the opportunity to mаkе іndереndеnt fіnаnсіаl dесіѕіоnѕ. This has made our financial іnduѕtrу mоrе trаnѕраrеnt, with ѕесurе trаnѕасtіоnѕ, and rеduсtіоn іn frаud.
WHEN DID DEFI COME INTO EXISTENCE?
There are arguments as to when DeFi Started. One could argue that DeFi started in 2009 with the advent of Bitcoin. BTC was the first-ever peer-to-peer digital money built on blockchain technology. Bitcoin brought about the decentralization of the traditional financial system.
In 2015, the launch of Ethereum allowed anyone to write a smart contract and decentralized application that formed the ecosystem of Decentralized Finance (DeFi). It facilitated more functionalities beyond money transfer.
WHAT IS DeFi (DECENTRALIZED FINANCE)?
DeFi (or “decentralized finance”) is an umbrella term for financial services built on blockchain technology with an assortment of applications and projects towards disrupting the centralized (Traditional Financial ) system. (TradFi).
It is based on applications and peer-to-peer protocols developed on secure decentralized and distributed ledgers similar to the used case of cryptocurrencies.
It follows the decentralized technology built by Ethereum. It runs on smart contracts rather than relying on intermediaries, e.g., banks and or exchanges.
“Smart contract is an agreement between people in the form of a computer code. It automatically documents and executes legal events and actions based on the contract”.
DeFi has introduced a reliable change beyond the prevailing assumption of the closed financial market. It allows anyone with a smart gadget and an internet connection to make seamless investments, trade, lend, and send money abroad. It enables them to do anything and everything (related to digital money), putting their money to work on their terms without stepping out.
UNDERSTANDING THE DIFFERENCES BETWEEN DeFi AND CeFi (TradFi)
With the rapid growth in the acceptance of DeFi as an alternative to traditional financial systems, it is pertinent to understand the differences between DeFi and CeFi to ascertain its validity and the possibility of our traditional financial institutions embracing the new technology.
But the question remains. Wіll оur trаdіtіоnаl fianacial іnduѕtries еmbrасе thіѕ tесhnоlоgу оr bе rерlасеd bу іt?
This post section provides a side-by-side comparison that gives clearer differences between decentralized finance (DeFi) and Centralized Finance (CeFi).
- TRUST
Centralized Finance (CeFi)
Intermediaries like banks control your money.
Decentralized Finance (DeFi)
No intermediaries are involved. Trust smart contract to handle it.
2. TRANSPARENCY
Centralized Finance (CeFi)
No access to the inner core of banks or middle hence completely removes transparency.
Decentralized Finance (DeFi)
It provides an open-source transaction model.
3. CUSTODIAN
Centralized Finance (CeFi)
No transfer of custody of funds, assets, and data.
Decentralized Finance (DeFi)
Non-custodian. It provides a full transfer of custody of funds.
Allow people to have control over their assets and data.
4. IDENTITY
Centralized Finance (CeFi)
Requires KYC for accessing CeFi services. Identity and credentials must be presented.
Decentralized Finance (DeFi)
DeFi services are used without revealing your identity.
Only a unique identification number is required.
5. ACCESSIBILITY
Centralized Finance (CeFi)
Not everyone has access to financial institutions. About 1.7 billion people have no access to a bank.
Works during business hours.
Decentralized Finance (DeFi)
With access to phones and the internet, about 76% of these people gain access to DeFi.
DeFi provides a borderless and accessible financial instrument to all.
Works 24 hours 7 days
6. CONVERSION
Centralized Finance (CeFi)
It allows the conversion of Fiat money to Cryptocurrency.
Decentralized Finance (DeFi)
It allows the conversion of Fiat money to Cryptocurrency.
7. CUSTOMER SUPPORT
Centralized Finance (CeFi)
Tailored for customer needs.
Decentralized Finance (DeFi)
No direct assistance with limited support.
8. FLEXIBILITY
Centralized Finance (CeFi)
Restriction to the movement of an asset. Permission has to be sorted before the asset can be moved.
Assets can be moved at anywhere anytime.
Decentralized Finance (DeFi)
An asset can be moved anywhere anytime without sorting any form of permission.
9. CRYPTO TRADING
Centralized Finance (CeFi)
It can be used to trade crypto.
Decentralized Finance (DeFi)
It can be used to trade crypto.
The above shows that DeFi gives a better and more promising approach to Traditional Financial systems. It has the potential to make financial services easily accessible to all.
We shall dive further into how does DeFi works and various use cases of DeFi in our next post.
