Why Do We Need Decentralized Finance?
Decentralised finance has been considered as an important vertical application of blockchain technology.
Starting with decentralised exchanges to lending protocols to a variety of new assets, we have witnessed great imagination and creativity in this space. But apart from the hype, why is it important and why do we need it in today’s world?
Decentralized finance brings the transparency and security of distributed ledger technologies to traditional finance use cases, while reducing inefficiencies and solving pain points. Similar to migrating financial processes from the physical realm to the digital realm, de-fi intended to migrate from the current infrastructures to more robust, secure, and efficient systems.
This migration is expected to have a stark positive impact on the overall user experience as well as the growth and expansion of financial services. In this article, readers can gain an understanding of how blockchain enables the realization of some particular use cases.
Services for the Unbanked
Blockchain provides an implicit guarantee of a necessary factor in every single form of traditional banking -- trust.
Traditional banking and financial services request trust in a central authority for reliable mediation and custody. From the user’s perspective, accessing a trusted central authority results in large premiums, which pose barriers of entry for people with lower incomes.
More inhibitors in the traditional banking system include inefficiencies due to verification processes and middle men, central points of failure with extremely high stakes and in-accessibility issues in lending, all of which are barriers of entry to the 1.7 billion unbanked adults today.
With an auditable, immutable ledger backed by consensus mechanisms, and open sourced smart contracts, decentralized technologies are able to transfer the burden of trust from a central authority and your fellow transactors, to the software and the existence of an honest, active majority.
This along with the ability to securely automate the creation and settlement of agreements using smart contracts and the simplicity of crypto-collateral loans provide the basis for secure, reliable and accessible financial services for the world’s large underbanked and unbanked populations.
Through a native stablecoin that is introduced by design to enable users to access more financial services, users could exchange fiat currencies to stablecoins; and by holding this stablecoin, they could enjoy the same features like having a bank account -- there will be interests earned for deposits and the money could be transferred among users and spent in payment apps.
Stablecoins greatly improve user experience, accelerate the adoption of blockchain technology, and provide users with a seamless experience like any other internet-based applications.
The decentralized nature of cryptocurrency asset possession has also been used to create a method of gaining exposure to different asset classes without having to trust a third party -- crypto synthetic assets.
Synthetic assets use combinations of different assets to simulate a desired asset, so that an investor can benefit from holding an asset class without actually having to hold it.
Stablecoins are the most widespread example of synthetic assets in decentralized finance, allowing transactors to avoid the risks that come with the volatile crypto assets by harnessing the relative stability of fiat currencies.
The problem with fiat-collateralized stablecoins or synthetics, is that the central entity overseeing the network must be trusted to hold a certain amount of currency in order to safely collateralize assets of investors in the network.
Crypto-collateralized synthetic assets, or crypto synthetic assets allow users to use their existing crypto assets to collateralize synthetics, removing this need for trust in central entities.
The trusted and secure decentralization of cryptocurrencies allows for users to transfer collateralization trust from central entities to the blockchain-based systems which ensure their control of the asset through reliable consensus protocols.
By offering a Turing complete virtual machine that is also compatible with EVM, the native stablecoin in place, there could be more opportunities for developers to build financial assets in the ecosystem.
Trust is the Enabler
The case for decentralized finance relies heavily on the ability of the underlying technology to effectively source reliable consensus from honest users to enable implicit trust.
A proof-of-stake blockchain along with its BFT consensus protocol mathematically assures a new level of security in open networks, in order to provide this effectiveness.
By increasing reliability thresholds and protecting against denial of service attacks, we build to provide airtight infrastructure for the realization of the promises of decentralized finance.
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