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DeFi— the Solution to Centralized Financeby@talktomaruf
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DeFi— the Solution to Centralized Finance

by Abubakar MarufMay 31st, 2022
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DeFi is a P2P model of a financial system that shuts out centralization by granting governance to anyone that has access to a computer or a smartphone and the internet. Central authority in this form of financial system limits what you can do with your and how easily you can access your asset 24/7-365. DeFi represents another form of digital solution to the odds and limitations posed by the centralized financial entities- such as banks and the central banks. The smart contract made DeFi automated and trustless.
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Since time immemorial, the digital world has offered permanent solutions to humanity's livelihood. It has either proffered solutions to many problematic endeavors or paved a better and easier way. This perpetual savior of the digital world has made economic researchers project the theory of "computers taking over human jobs," which has been peddled for some time now.


According to a report published by the World Economic Forum in 2020, about 85 million jobs will be replaced by AI machines by 2025, and at the same pace, another 95 million new jobs will be created the same year. As weird as this sounds, it's still good news.


DeFi is a major financial breakthrough that validates the opinion that computers and technology are taking over and might even take over quicker than projected.


How?


Have you ever imagined you could conduct financial transactions without banks and allied financial institutions in the last two decades or even in the last decade?


Have you ever thought of the possibility of sending a sizeable amount of money without being flagged?


Have these and many more been made possible through DeFi? What is DeFi?


DeFi— a blended word from Decentralized Finance and pronounced as de-fiy ( as in fibre)— is a blockchain-based financial solution to the odds and limitations posed by the centralized financial entities- such as banks and the central banks. I used the word "solution" because DeFi simplifies financial transactions in opposition to the conventional method of financial transactions.


Still not getting it?


For simplicity, let's inversely assess DeFi through centralized finance.


What is Centralized Finance—TradFi?

Traditional Finance—TradFi— or Centralized Finance, is a financial ecosystem managed by a central authority. A notable example of such a financial system is conventional banking and other related financial institutions.


The centralized feature of the financial system is the inclusion of central authorities—governments—and third parties in the financial ecosystem. Central authority in this form of financial system limits what you can do with your and how easily you can access your asset 24/7-365.


You'll understand this better as we discuss it further.


So, what is DeFi?

DeFi is a decentralized financial ecosystem built on distributed ledger technology, otherwise known as blockchain technology to promote seamless financial transactions and make financial services accessible to all and sundry.


It is a P2P—peer-to-peer—model of a financial system that shuts out centralization by granting governance to anyone that has access to a computer or a smartphone and the internet.


Yes, you read it right!


The P2P model basically shuts out mediators like bankers and brokers just the way decentralization etched out central governance. Mediators in centralized finance were replaced with a string of self-enforcing codes that integrated predefined and self-executing terms of the agreement, known as "Smart Contract."


The smart contract made DeFi automated and trustless.


Wait up, does that mean you can't trust DeFi? No!


Since DeFi is a P2P ecosystem, you don't have to be worried if the other party you're transacting with can be trusted. All you have to do is rely on the smart contract to act unbiasedly on your behalf.


Can you see how DeFi is becoming a solution to centralized finance? Not yet or not enough?


Please wait and read further!


Imagine saving your money with an online savings account where you're to earn an interest rate of 0.80%. After saving your money, the bank lends your money to another customer at a 5.5% interest rate. The bank just made a 4.7% profit on your money, and you get just 0.80%. But with DeFi, you deal directly with the borrower and claim the full 5.5% profit.


How does DeFi relate to Fiat Money?

All transactions on DeFi are done in crypto as a means of exchange since DeFi represents another form of digital solution to our financial ecosystem.


Cryptocurrency is a digital currency that is a means of exchange in the blockchain ecosystem. There are various kinds of crypto, as each crypto is a native coin of each blockchain. Bitcoin is the native coin of the Bitcoin blockchain; ETH is the native coin of the Ethereum blockchain, and so on.


To be part of DeFi, one has to exchange fiat money for digital currencies, which can be done on centralized and decentralized crypto exchange platforms. Some countries support buying crypto with credit and debit cards, while some don't. However, you can purchase Cryptocurrency via P2P transactions in almost all countries.


How DeFi Outshines Conventional Banking Systems and other Financial Institutions

DeFi offers all financial products and services provided by centralized banks in a flexible version. You can loan or take a loan on DeFi, apply for insurance, and trade assets, among others.


So, how does DeFi outsmart Centralized Finance?


1. Flexibility

There are limits to what you can do in centralized finance and the time you can also make transactions. It is widely known that Thursdays and Fridays are usually the worst banking days of the week. Banks are consistently unable to complete financial transactions during weekends and holidays.


With DeFi, you can send or receive digital currencies and tokenized assets anytime, anywhere. There is no limit to what you can send or receive, and there's neither downtime nor paperwork. You don't have to wait for any third party's approval. Day and night, you're in control of your assets, 24/7-365.


2. Transparency

DeFi is not opaque as conventional banks. Everyone involved can monitor transactions in real-time. This is possible due to the decentralized framework of blockchain technology, a public ledger of transactions. No centralized financial institution will/can make their ledger public, and they will never give you absolute control over your assets.


3. Openness

DeFi is open to all and sundry with internet access. There is no restriction on who can use or access DeFi products and services. Unlike banks where you have to enroll for some services or even open an account, all you have to do in DeFi is create a wallet and start transacting in crypto.


4. Cheaper and Faster

DeFi, unlike TradFi, is cheaper to use with less transaction fee or gas fee. Say you buy groceries with your credit card; you pay a transaction fee to the following mediators:

i.  Acquisition bank that offers merchant accounts to the grocery store

ii. Credit Card Provider

iii. Your bank


Each of these trios—a third party—will charge you for whatever services are rendered. By cutting them off, you pay a small transactional fee; this is what DeFi offers. Imagine if there was internet lag where these third parties couldn't transact. Your payment will loiter. But for DeFi, your transaction is seamless without downtime. Except that you have to wait for a few seconds for the transactions to be validated.

5. Anonymity

Unlike banks that attach your name to your bank account, DeFi protects your identity. You don't need your name or personal information to transact on DeFi. In case you're worried about trust, trust the smart contract.


DeFi can be accessed via Dapps—decentralized applications. Dapp is a web service developed on blockchain technology. Dapps are not only built for DeFi alone; they also offer web services like social media platforms, gaming, marketplaces, and so on.


Conclusion

DeFi uses blockchain and cryptocurrencies alongside the smart contract to offer financial services and products without third-party interference.


With DeFi, you can

  • Access stable currencies / Stablecoin issuance
  • Instantly send and receive money from anywhere in the world
  • Lend money with or without collateral.
  • Access flash loans
  • Trade tokens and derivatives
  • Save your crypto and earn interest. All of these anytime and anywhere in the world.