Sumit BeraMon, Jun 22, 2020 11:00 AM
The World Is Changing Right Now: DeFi Brings A New Paradigm To Finance
Cryptocurrencies have taken deep roots in our lives, pointing the way to blockchain technology. The next logical development step is the entire Decentralized Finance industry – DeFi.
Smart contracts for ICOs made a real splash. For a good while, this method of collecting money remained the main advantage of the blockchain. The main, but not the only one. Now a new revolution called Decentralized Finance begins.
Last spring, Forbes magazine called the DeFi sector "a new movement that is pumping oxygen into the cryptocurrency industry." Decentralized finance has indeed become the trend of 2019 and still, their popularity continues to gain momentum.
Most of the existing DeFi was created on the Ethereum blockchain and the number of new applications in the field of decentralized finance is growing steadily.
So, in mid-June 2020, the number of Ethereum locked on smart contracts of DeFi applications (the amount of money people sent to smart contracts) reached $1,18B, according to defipulse.com. Total Market Capitalization made: $3,919,732,830 (as of June 18, 2020). The maximum amount locked was stated on February 15,2020, and made an incredible $1,21B.
DeFi vs Banks
DeFi represents financial tools in the form of services and applications based on blockchain. The main task of decentralized finance is to become an alternative to the banking sector and replace the traditional technologies of the current financial system with open-source protocols. That is, to open access to decentralized lending and new investment platforms to a large number of people. And to allow them to receive passive income from cryptocurrency assets, as well as to save on commission fees for transfers, loans, and deposits.
Decentralized finance is sure to beat the banks, and they already do this in terms of profitability and ease of use. Since users store their own funds that are protected by smart contracts, banks seem to be largely redundant compared to them.
With the already well-established Ethereum as its main platform, there is a solid foundation for a future free of centralized banks, which again and again prove that they cannot be trusted. Recall the US mortgage crisis that began in mid-2007. Then the United States market was flooded with many mortgage-backed securities, bonds, and other financial instruments, which were, in fact, unsecured. The United States government has sought to make housing more affordable for the poor. In particular, the American authorities practiced the artificial limitation of the growth of mortgage rates.
A glimpse in history
Historically, centralized authorities, such as governments, issued money that formed the base for the economy. It was assumed that central banks and institutions would carefully manage and regulate the supply of foreign currency in circulation. However, as soon as the size and complexity of our economies grew, these central authorities acquired more and more power, as more and more people trusted them.
You trust your government that it will not print more money overnight. You trust your bank that it will keep your money safe. And when it comes to investments, you entrust your assets to a financial advisor. By transferring control of your money to others, you hope to make a profit. But the sad truth about our current financial system is that the power that comes with this trust does not always make a profit. Thus, a significant share of power and influence is concentrated in the hands of a few people.
We talk very little about how corporations manage our investments and how our governments manage the economy. And in most cases, investors receive only part of the profit, which does not always correspond to the risks taken by these centralized authorities.
DeFi applications do not need intermediaries. The code determines the resolution of each possible dispute, and users, in their turn, control all their assets. This reduces the cost of providing and using products and allows creating a more trouble-free financial system.
Is there a third-party?
Decentralized Finance works on smart contracts and:
- does not depend on the corruption of individuals;
- does not concentrate a lot of money and power in a single pair of hands.
With banking emulated programmatically through protocols and without need to trust anyone, utopian libertarian anarchy becomes less utopian.
From the point of view of Bitcoin Oracle and Civic CEO Vinny Lingham DeFi can turn inside down the way we understand financial services.
“I think we have got to a point where financial services can’t scale,” says Vinny. “The existing banking paradigm has a bunch of risks, costs, and consequences, as well as censorship globally, which makes it really difficult to scale. For example, if we look at interest rates, look at the difference between what you are receiving and what you are paying, and the profits the banks make. If we think about the way we consider banking, it’s really centralized by nature. Financial services are broadly someone looking after your money, and they are taking a cut.”