Most of the democratic governments in the world are based on the system of representation This means that people choose someone to send to the nation’s capital to represent them. In a world without the internet, this made perfect sense. Now, when everyone can vote on every single issue with a click of a button on their phone… not so much.
Another thing that is quickly getting outdated is a conventional, centralized financial world. If there’s one thing that cryptocurrencies showed us is that DeFi can definitely work (no pun intended). But, this won’t happen anytime soon because of things like habits, lobbying, and traditionalism.
While we wait for this inevitable financial revolution to occur, here are some of the biggest changes that are happening due to DeFi.
The Biggest Changes That Are Happening Due to DeFi
1. Removing the Need for Intermediaries
One of the most incredible things about the DeFi is the fact that it works on a peer-to-peer platform. Every participant in the system is equal (no matter how much funds they have), and they are proportionally represented on the platforms.
With the help of smart contracts (which we’ll mention a bit later), there’s no need for escrow or supervisors to ensure that the contract is honored and the terms specified there are executed.
The bottom line is that the fees are much lower since there are no intermediaries. Sure, the system still needs to charge something for upkeep, but there are not as many employees as in the traditional finance field, and there are no massive downtown buildings to pay rent for. In other words, physical infrastructure is minimal, efficient, and on a must-need basis.
This is also liberating to a lot of people who are in need of financial services but are facing too much paperwork and jumping through hoops to get something done.
Most importantly, people are afraid that banks and big financial institutions are rigged against them. With a decentralized system, coordinating such a conspiracy would be impossible (from a practical standpoint).
2. Open Access
What we mean when we say that DeFi has open access is the fact that the system itself is permissionless. In other words, you don’t need a special permit, and there’s no government body that will prevent you from registering an account. You need no special permit to start mining BTC or anything like that.
Second, cryptocurrencies and DeFi are globally available. All you need to start a crypto wallet is a smartphone, which almost the entirety of the world now has access to. The fees are low, and international payments are quick, which is why this is one of the main forms of transfer used for remittances.
In other words, this type of financial system is a great equalizer. They say that banks want you to prove to them you don’t need a loan in order to get approved for one. Well, when it comes to P2P lending, this won’t be a problem that you’ll have to face for long.
Exchanges are also decentralized, which means that you don’t even have to create an account in order to buy or sell crypto. This provides you with an extra layer of anonymity, even though it doesn’t exempt you from your tax responsibilities.
3. More Transparency in Investments and Transactions
While major financial institutions are under rigorous control, the majority of people still believe that there are all sorts of machinations and malversations going on there. It doesn’t take a conspiracy theorist to believe in stories about favoritism, insider trading, and all sorts of systemic rigging.
Also, with so many new assets out there, there’s always an opportunity for one to be an early adopter. All you need to do is find crypto presales to invest in and use your opportunity. The majority of other assets are already too old for an early buy-in, which is why this presents a unique opportunity you shouldn’t miss.
A lot of blockchain networks are public or permissionless. This allows anyone to access the transaction history and find the details of a particular smart contract. This way, shady dealings will be a lot harder to conceal, but this will also benefit financial institutions, which will have access to all the data they need without having to deal with too much red tape.
What we’re talking about is the on-chain auditing. This will lead us to a quicker, more dependable financial system. It may sound scary, but in the long run, this is supposed to benefit everyone.
4. Smart Contracts
Out of all the DeFi concepts and technologies, it’s smart contracts that have the potential to make the world of finance truly decentralized. Namely, these contracts work on blockchain technology (which makes them immutable without a proper key and near-impossible for hackers to tamper with), and they’re the future of online interactions.
The way they work is simple: the algorithm is set with a special set of conditions. Once these conditions are met, the contract will self-execute.
What does this mean? First of all, the costs are drastically reduced since there’s no expensive infrastructure you have to maintain. There are no armies of lawyers, accountants, inspectors, and executives behind it.
Second, it’s much more reliable. If the algorithm is set right, the system will execute every single time. This means that there’s no human error or manipulation in a way that will cause a large market disruption.
Ultimately, this is the way of the future. With more and more items connected to the internet and IoT in full swing, the relevance of these self-executing contracts will grow.
5. Tokenization of Assets
The concept of using a non-physical asset to represent a physical asset is nothing new. After all, when going to a bank and using your home as collateral, they don’t ask you to bring your home so they can see it. What they want is paperwork that proves that you own the place, as well as documents that prove its value and characteristics.
Tokenization is a similar concept, with a few small differences. First of all, since it’s a digital asset, it’s much quicker and more faithfully represents the real world or digital asset.
Just think of an RPG video game where you have an inventory. In this inventory, you can have an object (an axe, a sword, or a magic wand). The icon in the inventory is a token, but once you equip it in the right slot, your character’s avatar will be displayed with this item in their hand and be able to perform tasks that are related to this item.
With the help of blockchain, this can serve as proof of ownership, and it can actually solve the issue of digital IP once and for all. The concept that’s coming closest to this idea is one of NFTs (non-fungible tokens), and they have the potential to completely change the art world as we know it.
The Only Reason This Wasn’t Done Sooner is Because We Lacked the Technology
Now that we have the necessary technology, the benefits of DeFi are too numerous and great to ignore. With more and more individuals and businesses actively using cryptocurrencies, this claim is proven to be truer and truer. It’s only a matter of time before this concept assumes an even bigger part in the financial world.