Decentralized Finance (DeFi) is one of the many innovations in the world of blockchain technology. We are going to take a look at what DeFi is and what the implications will look like. But first, one of the things that make blockchain technologies so amazing is transparency. The fact that all of the transactions can be traced and verified by anyone, with respect for privacy, makes it possible to create models like DeFi Pulse. Although exchanges and derivatives platforms like Bitlevex are doing a great job, the DeFi protocols can reach far more people since they do not need licenses to operate. This is why DeFi, in politics, is often referred to as the Wild West. Let us see how wild it is.
Table of Contents
DeFi explained
‘’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 being Ethereum.’’ (Source: Wikipedia)
This technical explanation of DeFi is spot on, but what does it mean? In one word, trustlessness. DeFi removes trust and achieves fairness for anyone participating in its systems. Since anyone can verify the open-source code used, anyone can verify all the transactions being done and, anyone can participate in making improvements to these protocols, the result is that nobody needs to trust each other anymore and people only have to trust the systems.
Trust is a very important subject, especially in the financial world. One of the solutions that DeFi offers is that earning passive income by lending out your money. On the other side of this equation is of course borrowing money. Especially in developing countries, these topics are very interesting. The great thing is that developed countries can help developing countries in ways that weren’t possible before.
DeFi for the unbanked & banked
In most developing countries people are unbanked. This means they mostly trade only with cash and cannot get a loan from a bank to, for example, start a business. Most of the time the only hurdle is that people do not have the right documentation or a bank account is simply too expensive to get. This, of course, excludes a lot of people from the global financial system and if they could participate they would have a positive effect on the economy. With the power of DeFi, people around the world can share and grow prosperity without relying on intermediaries and institutions. Instead of having multiple national banks that compete with each other who are regulated by a local government and can only serve people with the right credentials. We can have open, global, borderless systems that can be used and improved by everyone that do not discriminate, charge high fees or exclude people from participating.
In a few years, we will see what the effects have been for societies around the world where DeFi is being adopted right now. El Salvador, the first country that has adopted Bitcoin as legal tender, is using the Lightning Network for payments to trade within the country and people outside El Salvador are using it to send remittances.
The great is that DeFi empowers the unbanked to participate in the global financial system and it incentivizes the banked to provide the resources that are needed. When the financially excluded become included through DeFi and various other cryptocurrency innovations they are immediately empowered to start providing their resources to others.
If you live in any country and do not have access to a bank account but you want to start a business or improve your already existing business, there is no easy option. But on various DeFi platforms, you can get the loan you need, you can use QR codes to receive and send money, you can store money in a more secure way than cash, and when your business (improvement) succeeds from the loan you got you now can grow your capital by lending it out as well. In this way, money around the world becomes a way to get each other up and in instead of keeping each other down and out.
Conclusion
The implications of a DeFi future are simply more and better ways to increase wealth globally and decentralize that wealth. Instead of the systems that ‘’take from the rich and give to the poor’’ or even worse ‘’take from the poor and give to the rich’’, which both of them just centralizes power. DeFi offers systems that implement rules where whether you are rich or poor the incentive to help is far larger than the incentive to cheat will ever be.
‘’A new type of thinking is essential if mankind is to survive and move to higher levels.’’
– Albert Einstein.
The developments in Decentralized Finance are surely a new type of thinking and it may bring mankind to the next level.
