WHAT IS DEFI
Decentralized finance is an open financial sector that runs on software built on top of a public blockchain like Ethereum. It involves the building of financial products and services on top of a blockchain with the aim of promoting or enhancing the development of an open financial system.
Defi is aimed at solving the following
1)Payment and clearance system.
With Traditional banks, it is difficult to make international transfers, in countries like Nigeria with the latest Central bank of Nigeria (CBN) directive on Naira notes, sending a huge amount of money to friends or siblings abroad will be tasking and very difficult, apart from the CBN directive on Naira, sending money abroad could take few working days to complete and also charges/fees are included.
*These charges or fees include: *
The international wire outbound fee, and the international wire inbound fee and exchange rate.
With additional working days for the recipient to receive the money.
So Why DeFi in Payment?
Cryptocurrencies that are powered by Defi will bypass intermediaries(banks) with lower fees compared to financial institutions. For example, if you Transfer cryptocurrency to a friend in any part of the world it will take between 15sec to 5 minutes.
Many people in 2023 still don’t have a bank, The World Bank estimates that as of 2017 out of the 1.7 billion people who do not own an account at a financial institution, more than half of them are from developing nations, poor households and they do not have bank accounts because of geographical, poverty and trust issues.
The World Bank also estimates that two-thirds of the 1.7 billion unbanked population have access to Mobile phones.
With DeFI Applications and an internet connection, these millions of unbanked population will have access to financial transactions in the comfort of their homes without going through lengthy verification processes as required by traditional banks.
Note: (DeFi represents a movement that seeks to push borderless, censorship-free, and accessible financial products for all. Defi protocols do not discriminate and level the playing field for everyone.
3)Centralization and Transparency:
What is centralization?
This is the concentration of control of an activity or organization under a single authority.
“The centralization of all financial power is in the hands of its leaders and Government
What is Transparency?
Transparency is the quality of being easily seen through, while in business and governance context refers to being open and honest.
Banks are one of the centralized points of failure in the financial system, for example in 2008 the Lehman Brothers led the start of that year's financial crisis.
According to Nigerian Deposit Insurance Corporation(NDIC) an agency that protects Banks in Nigeria disclosed in 2020 that since the Agencies incorporation in 1988, 425 financial institutions in the country have been liquidated.
Out of the 425 financial institutions, 51 of them are Deposit Money Banks, 325 Micro Finance banks, and 51 Primary Mortgage Banks.
The failures of these banks are a result of Massive insider abuses by their owners and officials.
Institutions like Washington Mutual, with over $188 billion in deposits, and Lehman Brothers, with $639 billion in assets, both failed in 2008. In the US alone, over 500 bank failures have been recorded.
The above can be solved by DeFi,
DeFi protocols built on top of public blockchains such as Ethereum are mostly open-sourced for audit and transparency purposes. They usually have decentralized governing organizations to ensure that everyone knows what is happening and that no bad actors can single-handedly make bad decisions.
DeFi protocols are written as lines of code, you cannot cheat the codes as it treats every participant equally without discrimination. The codes run exactly as they are programmed to, and any flaws quickly become evident as it is open for public scrutiny.
DeFi’s biggest strength is thus its ability to remove intermediaries (Third parties ) while operating with zero censorship.
DeFi opens up huge windows of opportunity and allows users to access various financial instruments without any restriction on race, religion, age, nationality, or geography.
SOME FACTS YOU SHOULD KNOW**
Decentralized finance started gaining prominence as a replacement for the traditional finance system in 2018 when 15 Ethereum-based projects came together with the aim of building an independent, secure, and open financial system. Some of the early proponents behind the DeFi movement included MakerDao, Origin Protocol, and Paradigm.
Decentralized finance vs. traditional finance
•In decentralized finance, a public blockchain acts as the trusted source, governing all operations in the financial sector while public governance, which entails laws and licensed financial institutions, acts as the trusted source, governing all operations in traditional finance.
DeFi Use Cases
Decentralized finance threatens to phase out traditional finance because of its ability to provide financial services without geographical barriers. Traditional finance has struggled to reach some remote parts of the world, leaving billions without access to banking services.
people in remote parts of the world can now access banking services through their mobile devices. For that reason, DeFi promises to succeed in areas where traditional finance has failed.
Decentralized finance is also proving to be a reliable method of circumventing issues related to hyperinflation resulting from currency manipulation or unexpected devaluations.
Circumventing Censorship and Restrictions
The popularity of decentralized finance continues to grow because it could make it possible for people to circumvent bans or restrictions imposed by oppressive governments. The traditional financial sector comes with a lot of regulations and requirements that, at times, make it difficult for people across borders to transact business.
The integration of blockchain technology into a number of financial products, such as Ripple, makes it possible for people to send and receive money without having to worry about bans or restrictions
“Ripple is a blockchain-based digital payment network and protocol with its own cryptocurrency, “
Another extremely good use case of DeFi is its use in stablecoins. Stablecoins are created in such a way that its value doesn’t change. Decentralized finance coins are mostly stablecoins and they are a crucial part of this technology.
a number of apps have already been developed. The apps are giving people a taste of what the financial future could look like.
What are the Challenges?
One of the biggest challenges that could stop decentralized finance from replacing traditional finance systems
is anyone can hack smart contracts and steal all the keys, which could result in people losing substantial amounts of money.
My name is Maakai Princewill Blockchain content creator
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Oldest comments (2)
Thanks, am glad you did