DeFi, or Decentralized Finance, is the name that is defining a great trend, which is taking place around blockchain technology in recent years.
DeFi seeks to develop small traditional financial pieces but with an extra degree of transparency and decentralization. These small pieces, as if they were Lego pieces, are combinable with each other, in order to develop an entire ecosystem of small solutions that together form a great solution for finance that invalidate the need for centralized and opaque financial financial institutions that no longer add value.
That is the idea that has driven the creation of the term “DeFi”, and that has taken its evolution to the present point. In fact, at present it is impossible to overlook the very high impact that DeFi has on the crypto world. For that reason, we open a space to know what DeFi is and how this idea is changing the global financial world.
DeFi, the idea that is changing the financial world:
Imagine a world where anyone could create transparent, fair and efficient financial products, making banks, big financiers, lenders and insurance companies take a back seat, or better yet, become completely unnecessary and disappear. But also a world where anyone can interact with those products freely.
Well, this is what DeFi is. That is, it wants to convert the centralized finance structures that we have now, in decentralized structures, without trusted third parties, executed on smart contracts or smart contracts, within a blockchain where a written and unalterable record of each action is reflected in a transparent way.
The impact of a trend like this is gigantic. We are just in its early years and already the creativity of the global community is shaping alternative versions of almost all existing financial products.
Imagine that you have the need to get a credit to start a business. Instead of going to a bank, you can go to a DeFi platform and apply for a loan. This loan has quite clear and transparent conditions (except for technicalities). All this thanks to the fact that this loan will be controlled by a public and immutable smart contract.
Not only that, all actions performed on the platforms are visible and recorded immutably also on the blockchain. Perhaps you do not have the knowledge to verify the reliability of the DeFi service, but due to its transparency feature, thousands of eyes will be able to analyze and question it, alerting you of its malfunction if so. And in the future, given the impact of this technology, surely in school children are taught to read transparent smart contracts.
Thanks to DeFi, you won't need to be bancarized, you won't need to carry dozens of papers, line up to turn them in and wait weeks for a response. Instead, from the comfort of your sofa, with your smartphone you can do the whole process by receiving the money in your possession.
However, DeFi can be much more, they can be the vehicle for the economy and finance of that increasingly present world that with the help of Blockchain technology begins to be decentralized. The vehicle that opens the doors to international investments without so much bureaucracy, costs and time and with higher levels of trust and transparency. A vehicle for unbanked people to access services without the dictatorships of banks, having equal conditions to evolve personally in their development.
Without borders. Access to a DeFi platform has no borders. You can be in any country in the world and access their services without problems.
Benefits and non-benefits of technology:
Of course, as every technology has its benefits and no benefits, and for that reason we will examine some of them.
Benefit:
It enables access to financial services for millions of unbanked people. This is undoubtedly a golden opportunity to bring development and financial freedom to those who for various reasons have not been able to enjoy these services.
It makes the international financing of companies and projects much easier. DeFi platforms can be tailored to the needs of a target audience in order to bring development and investments where they are needed. And such investments can come from anywhere in the world safely.
It creates a new point of economic diversification and development. In fact, defis can mean an important point of economic development in the medium term due to the enormous economic potential of cryptocurrencies such as Bitcoin.
No Benefits:
Safety is still a point to polish inside DeFi platforms. While blockchain has proven to be a very secure technology, there are still many things to improve, especially with the level of security and security audit of smart contracts. A failure in a smart contract means a failure in the platform, as demonstrated by The DAO.
Protocols of action against the volatility of cryptocurrencies. Many DeFi platforms have created operating mechanisms that guarantee their economic stability against the volatility of cryptocurrencies. However, these mechanisms often seem inadequate. Or they simply do not fully protect the ecosystem from sharp fluctuations. A situation that leads to millions of losses. A case of this type is MakerDAO and DAI, whose fluctuations and correction actions have shown that decentralization and poorly adjusted protocols of action can often be a weakness for these platforms, if not handled correctly.
DeFi and FinTech What are their differences?
Now we have in our hands three models of finance that to some extent have a common goal that is to offer us powerful financial tools to help us strengthen our finances and portfolios. However, the way in which they achieve this is completely different for each of those models. If we are talking about traditional finance, new FinTech and of course DeFi.
We already know traditional finance, the centralized model, highly dependent on banks, convoluted, complex and unattainable for the vast majority of the world's population. We are talking about a model that we see already entering its twilight, not only because of its inability to innovate, but because the same ones that support them have begun to understand that these tools no longer work in today's world.
From the attempts to renew and improve this old system, comes our second model, FinTech (Financial Technologies–. We are talking about an attempt to create a digital finance system that allows to reach more people that is fast, efficient, cheap, global and above all easier to manage. Since the 1990s and the beginning of the new millennium, fintechs were rising as the pinnacle of fintech and seemed to be the next evolutionary leap in global finance.
However, that was left behind with the departure of Bitcoin, the arrival of Ethereum and the first DeFi systems. The fact of being able to build decentralized, safer, more universal, borderless finance definitely changed the rules of the game, not only because of its operation but also because of the possibilities of DeFi.
So we can compile A small list can help us differentiate them:
A FinTech is a centralized entity, built on software and controlled and objectionable environments. On the other hand a DeFi, works deploys its software on a decentralized blockchain.
FinTech contracts are contracts that follow the legal construct we all know. While in DeFi those contracts are established equal for all, the heart of a DeFi and its services are the smart contracts in blockchain that we can see and audit freely.
The approval decisions of a FinTech are tied to a bureaucratic chain, long or short, that means time that as users we waste waiting for a response to our requests. On the other hand, in a DeFi the chain is reduced between you and the person who will give you the credit, sometimes, the chain does not even exist, because the approval is made automatically if you meet or exceed the requirements that the platform requests to access its services.
A FinTech uses banks and the entire traditional finance structure to get you the resources you ask for. That means that yes or yes, you need to be a bank account holder and registered in the system to participate with certain guarantees. It also means that that money can be censored or limited if they so wish. At DeFi, this is not something you need to worry about, you do not need to have a bank account, just a cryptocurrency wallet where you receive your funds and the rest you have freedom.
Alejandro O. Asharabed Trucido
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